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Cross border insolvency the balancing act of lifting an automatic stay

News / / Cross border insolvency the balancing act of lifting an automatic stay

Ronelp Marine Ltd and others v. Stx Offshore & Shipbuilding Co Ltd and another[2016] EWHC 2228 (Ch)

As an increasing number of shipbuilders, particularly in China and Korea, are facing financial difficulties and the prospect of entering insolvency or rehabilitation proceedings, there is a greater risk that such proceedings could hinder ongoing English Court (or arbitration) proceedings. If insolvency or rehabilitation proceedings are recognised by the English Court as a “foreign main proceeding” under the Cross-Border Insolvency Regulations 2006 (“CBIR”), then the English Court proceedings will be automatically stayed and the onus will be on the creditor to apply to the English Court to lift the stay. 

In this case, the Court granted an application by creditors to lift an automatic stay of Commercial Court proceedings and, in doing so, provided clear guidance on the factors that it will consider in determining whether to lift a stay. 

The background facts

In 2012, a Chinese shipyard entered into shipbuilding contracts with the Buyers. For each contract, there was a side agreement that reduced the price of each vessel by US$6 million. 

The yard was a wholly owned subsidiary of STX Offshore & Shipbuilding Co Ltd (“STX”) and STX guaranteed the performance of the yard through performance bonds subject to English law and jurisdiction. 

In June 2014, the yard entered into a Chinese insolvency process during which the Chinese office holder issued a notice making it clear that the vessels would not be built and that the contracts were deemed rescinded. The Buyers considered this to be a renunciation and/or anticipatory breach of the contracts, which they accepted as bringing the contracts to an end. 

The Buyers claimed damages of US$90 million which was rejected by the Chinese office holder. The Buyers pursued STX and commenced proceedings in January 2015. 

STX argued that it was not liable on the basis that the agreement to reduce the contract prices under the side letter agreement was intended to mislead third parties and meant that the contracts were unenforceable on the grounds of illegality; the exercise of statutory power by the Chinese office holder to rescind the contracts could not amount to repudiatory breach; the Buyers were not entitled to damages, but simply return of instalments; and there could be no claim for losses because the yard’s obligation to commence building had not arisen. 

A hearing was fixed for 12 December 2016. 

Following a petition by STX to the Korean court, the Korean court made an order commencing rehabilitation proceedings on 7 June 2016. The administrator of STX applied to the English Court to give effect to the Korean rehabilitation proceedings. The Court recognised the rehabilitation proceedings as a “foreign main proceeding” on 23 June 2016 and, in line with the CBIR, automatically stayed the court proceedings. 

The Court decision

The Buyers applied for the stay to be lifted. The Court made it clear that the burden was on the Buyers, as the creditors, to make the case for relief and, in doing so, must:

i)    identify the nature of interest the creditors wish to promote;

ii)   address the question of whether the grant of such relief is likely to impede the achievement of the purpose of the insolvency proceedings; and

iii)  balance the creditors’ legitimate interest against the interests of other creditors, having regard to the nature and probability of prejudice on either side. 

It is established that the Court will only grant relief in “exceptional” cases. In this context, the Court took this to mean that “the applicant creditor must demonstrate a circumstance or combination of circumstances of sufficient weight to overcome the strong imperative to have all the [creditors’] claims dealt with in the same way (and in the same instance by the insolvency court)”

The Court took into account the following factors:

a)  the complexity of the monetary claim, which arose from difficult areas of English law such as illegality and the exclusion of common law remedies, and the likely bearing that the Korean Court would place on an English Court judgment;

b)  the advanced stage of the proceedings before the Commercial Court; and 

c)  the likeliness that the Buyers’ claim would be dealt with more speedily in English proceedings compared to the Korean insolvency proceedings. 

With the above in mind, the Court granted permission to continue the Commercial Court proceedings on the basis that the continuation of the proceedings would assist rather than impede the Korean rehabilitation proceedings and that, in the balance of interests, it would not unduly advance the interests of the Buyers over the interests of other creditors of STX. 

Comment

In determining whether an automatic stay of proceedings should be lifted, the Court will take into consideration the nature and status of the English proceedings and the impact this would have on the foreign bankruptcy proceedings. 

A key factor in this case was the complex areas of English law that the issues concerned, and the Court heard expert evidence on how the adjudication of a foreign court would be very powerful evidence in the Korean rehabilitation proceedings.

Furthermore, the advanced status of the English Court proceedings (and the prospect of a hearing only a matter of months away) seemed to reinforce the Court’s view that proceeding with this case had the potential to greatly assist and speed up the Korean rehabilitation proceedings. 

However, above all else, it seems that the Court placed a lot of emphasis on whether lifting a stay would unduly disadvantage other creditors. In this instance, the Court concluded that it would not and that it had the potential to greatly assist the rehabilitation plan. However, in circumstances where other creditors may be disadvantaged if proceedings were to be continued, it may be that the Court would be more reluctant to lift a stay. 

Chris Kidd

Chris Kidd Head of Shipbuilding and Offshore Construction, Joint Head of Energy & Infrastructure, Partner

David Choy

David Choy Managing Associate

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