Blog - 23/03/2016
Restructuring & Insolvency
Misuse of process and recognition under the UNCITRAL Model Law on Cross-Border Insolvency
Foreign insolvency proceedings can be recognised in England under the UNCITRAL Model Law on Cross-Border Insolvency, implemented by the Cross-Border Insolvency Regulations 2006 (SI 2006/1030) (the “Cross-Border Regulations”).
The Cross-Border Regulations provide for the recognition of two types of insolvency proceedings:
- foreign main proceedings: proceedings in a jurisdiction where the debtor has its “centre of main interests”. There is a rebuttable presumption that the corporate debtor’s registered office (or, in the case of an individual debtor, the place of his/her habitual residence) is the centre of the debtor’s main interests; and
- foreign non-main proceedings: proceedings in a jurisdiction where the debtor does not have its centre of main interests but has an “establishment” (defined as any place of operations where the debtor carries out an economic activity, which is not of a temporary nature).
Pursuant to Article 20 of the Cross-Border Regulations, upon recognition of a foreign insolvency as a foreign main proceeding, an automatic stay will prevent:
- the commencement or continuation of actions or proceedings concerning the debtor’s assets, rights, obligations or liabilities;
- execution against the debtor’s assets; and
- the transfer, encumbering or other disposal of the debtor’s assets.
In a recent case of Nordic Trustee ASA and another v OGX Petroleo e Gas SA (Em Recuperacao Judicial) and another  EWHC 25 (Ch), the English High Court held that foreign representatives and their advisers must ensure that the process for recognition under the Cross-Border Regulations is not abused and that, when seeking recognition, full and frank disclosure is made to the Court in respect of any impact that recognition of the foreign proceeding may have on third parties who are not before the Court.
Facts of the case
The background to the matter concerns a vessel, OSX 3, owned by Dutch company, OSX 3 Leasing B.V. (“OSX 3 Leasing”), and constructed with the financial assistance provided by Nordic Trustee, in respect of which Nordic had the benefit of a $500m secured bond from OSX 3 Leasing.
OSX 3 Leasing chartered the vessel to OGX Petroleo (“OGX”), a Brazilian company, and assigned its rights under the charter to Nordic Trustee. Following financial difficulties in late 2013, OGX entered into a reorganisation plan (“Plan”), which was subsequently approved by the Brazilian Bankruptcy Court.
In the interim, OGX and Nordic Trustee were involved in negotiations in respect of the daily hire rate under the charter. Under the terms of a new charter agreement, agreed in September 2014 and after the Plan, the first charter was replaced and an arbitration clause in favour of the London Arbitration Court was included. Under the Plan, OSX 3 Leasing and Nordic Trustee were not creditors (i.e. they did not fall to be considered ‘pari passu’ with OGX’s other creditors) and the Plan sanctioned any new charter agreement entered into between OGX and OSX 3 Leasing.
Following issues with OGX making payments under the second (new) charter agreement, and subsequent proceedings issued in the Brazilian courts, in June 2015 OSX 3 Leasing requested an arbitration under the second charter agreement and sought relief to force OGX to withdraw the Brazilian court proceedings. On 24 July 2015, OGX applied to the English Court for the recognition of the Plan as a foreign main proceeding under the Cross-Border Regulations with the aim of staying the proceedings (which included an arbitration). OGX’s application under the Cross-Border Regulations was made without notice to Nordic Trustee and OSX 3 Leasing.
Nordic Trustee applied to the English High Court for the automatic stay to be lifted in order to allow the arbitration in London to proceed. In its judgment in favour of Nordic Trustee, the Court emphasised that, in making any application for recognition under the Cross-Border Regulations, the applicant must make a full and frank disclosure of the possible effects of recognition upon third parties not before the Court.
OGX’s evidence intentionally failed to address the question of whether the stay, which came into force automatically upon recognition under the Cross-Border Regulations, was vulnerable to challenge by Nordic Trustee and OSX 3 Leasing, as creditors outside of the Plan, which constituted an abuse of process.
In this case, the Court highlighted that the Model Law on Cross-Border Insolvency is intended to be a ‘tool for achieving a co-ordinated, global solution for all stakeholders of an insolvency proceeding’ and that the Model Law stay on proceedings is intended to safeguard the ‘pari passu’ position of unsecured creditors in a cross-border insolvency.
This decision has clarified the duties on a foreign officeholder for a recognition order under the Model Law. It will now be necessary for foreign officeholders and their advisers to consider the effects which follow from recognition and thorough evidence will be required in support of any recognition application, which may make for the process to become more complex.
If you wish to discuss any of the issues raised above, please contact Kunal Gadhvi – Partner, or Alexander Muksinov, Associate.
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