Why did the English court refuse a request to stay termination of contract under CBIR, art 21?

Why did the English court refuse a request to stay termination of contract under CBIR, art 21?

Why did the English courts in Pan Ocean Co Ltd refuse the South Korean administrator’s request to stay termination of contract triggered by insolvency under CBIR, art 21 and what will this decision mean in practice for foreign representatives seeking relief from the English courts?

Original news

Pan Ocean Co Ltd Re; Fibria Celulose S/A v Pan Ocean Co Ltd [2014] EWHC 2124 (Ch), [2014] All ER (D) 03 (Jul)

Pan Ocean Co Ltd (the company) was a shipping company incorporated under South Korean law which was in an insolvency process in South Korea. The insolvency was recognised under the Cross-Border Insolvency Regulations 2006, SI 2006/1030 (CBIR), as a foreign main proceeding. The company had a long-term contract with Fibria Celulose SA (Fibria), which was a Brazilian exporter of wood pulp. The company wished to continue that contract, but Fibria considered it onerous. The contract, which was governed by English law, conferred on Fibria the right to terminate it by reason of the South Korean insolvency process (commonly called an ipso facto clause).

The administrator of the company contended that the ability to terminate was not valid under South Korean law. Fibria contended that was incorrect and, at any rate, the position under South Korean law was irrelevant. The administrator contended that, pursuant to CBIR, the South Korean court had power to grant relief including an order that Fibria should not terminate the contract. He contended that the court had jurisdiction to make an order restraining Fibria from relying on cl 28.1 of the contract, pursuant to the court's power under CBIR, art 21(1) to grant 'any appropriate relief'. Fibria submitted that the court had no such power and, alternatively, if such power existed, it should not be used.

How did the problem arise?

The company was in South Korean rehabilitation proceedings and had, prior to the rehabilitation proceedings, entered an English law governed contract with a Brazilian company, Fibria, to carry cargo for a term of 25 years. The company's South Korean administrator wanted to continue the contract as it was very profitable and its continued existence was important to the company's rehabilitation. The South Korean administrator obtained orders from the English court recognising the South Korean proceedings as the main proceedings and orders under CBIR, arts 20(6) and 21(1)(g) preventing any:

• enforcement of securities
• repossession of goods
• legal process against the company or its property
• appointment of an administrative receiver, and
• winding up petition

Fibria viewed the contract as onerous and exercised its right to terminate the contract on the company's insolvency.

What did the English court decide?

The English court made a number of findings:

Effect of previous orders

The previous orders of the English court preventing commencement or continuation of individual actions or proceedings didn't prevent Fibria serving the notice of termination.

The court also found that ipso facto clauses are not automatically invalid under UK law and referred to Belmont Park Investments v BNY Corporate Trustee Services [2011] UKSC 38, [2011] All ER (D) 259 (Jul) as authority that the anti-deprivation rule doesn't strike down ipso facto clauses. The policy behind the anti-deprivation rule is clear—the parties cannot, on bankruptcy, deprive the bankrupt of property which would otherwise be available for creditors. It is possible to give that policy a common sense application which prevents its application to bona fide commercial transactions which do not have as their predominant purpose, or one of their main purposes, the deprivation of the property of one of the parties on bankruptcy.

Scope of CBIR, art 21

CBIR, art 21 allows relief to be granted to protect the interests of the creditors, as an alternative to the assets of the debtor.

It would be odd for such a wide power to be intended without there being any specific reference to the recognising court's ability to apply the law of a foreign state, or even to do something which no system of law anywhere would allow, particularly given:

• CBIR, art 21(g) which deliberately limits relief to that available to a British insolvency office holder under the law of Great Britain, and
• the working group papers which deleted a power for the recognising court to apply the law of the foreign proceeding

This is in contrast to the Insolvency Act 1986, s 426 (IA 1986)and the Council Regulation (EC) 1346/2000 on insolvency.

Whenever the legal position under CBIR, art 21 has been described in English cases or textbooks, the discussion in the cases and textbooks proceeds on the basis that 'any appropriate relief' allows the English court to grant the same sort of relief as it would grant in relation to a domestic insolvency.

Approach of the English court

The non-exhaustive words 'any appropriate relief' are capable of being given a wide literal meaning. However, the very width of their literal meaning made the court somewhat cautious about construing the words literally and the court decided that it was not intended that the words should be given such a wide literal meaning.

When Rubin v Eurofinance SA; New Cap Reinsurance Corp v Grant [2012] UKSC 46, [2013] 1 All ER 521considered the scope of CBIR, art 21, it found that the CBIR (and the Model Law) says nothing about the enforcement of foreign judgments against third parties. It would be surprising if the Model Law was intended to deal with judgments in insolvency matters by implication.

What does this mean in practice?

Although it is perhaps disappointing that the English court did not assist the South Korean administrator to restrain the exercise of an ipso facto clause, the provisions of CBIR, arts 20 and 21 are still potentially available to stop actual litigation, execution against the debtor's assets or transfers, charging or disposing of the debtor's assets.

Further, it seems odd that the South Korean administrator didn't rely on CBIR, art 21(1)(g) to request additional relief (including relief under IA 1986, Sch B1 para 43) that might be available to a British insolvency office holder under the law of Great Britain. This provision could provide assistance in future cases.

Further reading

If you are a LexisPSL Subscriber, click the link below for further information on this area of law, see Practice Notes: 

Recognition and other applications under the Cross-Border Insolvency Regulations (Subscriber access only)

Relief applications under article 21 of the UNCITRAL Model Law (Subscriber access only)

Which law applies under the EC RegulationCourt-to-court assistance and Insolvency Act 1986, s 426 (Subscriber access only)

Not a subscriber? Find out more about how LexisPSL can help you.

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About the author:
Kathy specialises in restructuring and cross-border insolvency. She qualified as a solicitor in 1995 and has since worked for Weil Gotshal & Manges and Freshfields. Kathy has worked on some of the largest restructuring cases in the last decade, including Worldcom, Parmalat, Enron and Eurotunnel.