Agrokor DD and the matter of cross-border insolvency regulations

In the February 2018 edition of Corporate Rescue and Insolvency, we discussed the recent decision in Re Agrokor DD and in the matter of the Cross-Border Insolvency Regulations 2006 [2017]. The case serves as a useful reminder of the provisions and utility of the Cross-Border Insolvency Regulations 2006. A copy of our article can be found here , and is reproduced with the publisher's kind permission below.

Introduction

Re Agrokor DD and in the matter of the Cross-Border Insolvency Regulations 2006 [2017] EWHC 2791 (Ch) concerned an application by the ‘foreign representative’ of Agrokor DD (the ‘Company’), a Croatian company, for recognition in Great Britain under the Cross-Border Insolvency Regulations 2006 (the ‘CBIR’). The application was opposed by Sberbank (‘Sberbank’), a Russian bank and creditor. Sberbank claimed in excess of €1bn from the Company and had commenced arbitration proceedings against the Company in London in July 2017. Contested applications for recognition under the CBIR are uncommon. This case therefore serves as a useful reminder of some of the provisions of the CBIR and the issues the English court must consider in determining whether to grant recognition. The outcome of Brexit as regards Regulation (EU) 2015/848 on insolvency proceedings (recast) (the ‘Recast EIR’), Regulation (EU) 1215/2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (recast) (the ‘Recast JR’) and other EU legislation remains uncertain. However, it is possible, particularly as new insolvency and/or restructuring procedures continue to be introduced around the globe, that practitioners in the United Kingdom (and overseas) might need to become better acquainted with the provisions of the Model Law (as defined below), and other means of coordinating cross-border insolvencies and related disputes.

Background

The Company is the holding company of a group of companies (the ‘Group’) specialising in agriculture, food production and related activities in Croatia. Its annual revenue is around £6.5bn, and it was said to account for circa 15% of Croatia’s GDP (more, if one includes supply chains). Because of its size and systemic importance to the Croatian economy (and because a desired restructuring could not be effected pursuant to the existing Croatian Bankruptcy Law 2015), it became necessary to introduce specific legislation to resolve the Company’s financial difficulties. This new law, the Law on Extraordinary Administration Proceeding in Companies of Systemic Importance to the Republic of Croatia (the ‘Extraordinary Administration Law’), was passed by the Croatian government on 6 April 2017. The Company did not delay, and on 10 April 2017 the Croatian court made an order that the Company be made subject to an extraordinary administration. The commencement of an extraordinary administration has the consequence of, among other things, prohibiting the bringing or conducting of civil or enforcement proceedings against the debtor and its controlled and affiliated companies; in effect, a moratorium on claims. Therefore, both the Company and the Group became subject to an extraordinary administration.

Extraordinary administration

The court noted that the Extraordinary Administration Law was based, at least in part, on the Italian Legge Marzano, enacted in relation to the collapse of the Parmalat group. An extraordinary administration is overseen by an extraordinary administrator. Certain decisions require the approval of the court, the creditors’ committee, the relevant government Ministry or the government of the Republic of Croatia (as applicable). The Extraordinary Administration Law empowers the extraordinary administrator, with the approval of the creditors’ committee, to propose a satisfaction of creditor claims by way of settlement agreement. By the settlement agreement it is possible to, among other things, transfer some or all of the assets of the debtor to a third party, for the debtor to continue trading, for the debtor to merge with another entity, and to reduce or postpone the debtor’s payment obligations. Creditors are categorised by class, and each class must approve the settlement agreement by a simple majority. An extraordinary administration can be converted into a bankruptcy proceeding at any point in the process.

The cross-border insolvency regulations

The Recast EIR applies to Croatia. However, the Extraordinary Administration Law is not included in Annex A of the Recast EIR and, therefore, is not a ‘main proceeding’ to which automatic recognition is given. Accordingly, it was necessary to seek recognition via the CBIR instead. The CBIR were introduced in Great Britain (that is, England, Scotland and Wales) under the Insolvency Act 2000. This enacted (with some modifications) the model law (the ‘Model Law’) drafted by the 30th session of the United Nations Commission on International Trade Law, known as UNCITRAL relating to cross border insolvency. The Model Law was devised to resolve issues arising in crossborder insolvencies. Unlike other crossborder insolvency legislation (such as the Recast EIR), the Model Law (in unmodified form) does not require reciprocity from the requesting state in order for the enacting state to be obliged to recognise foreign insolvency procedures. Some states (but not Great Britain) have chosen to enact the Model Law to include a reciprocity requirement. Croatia has not adopted the Model Law. Under Art 2(i) of Sch 1 to the CBIR:

‘“foreign proceeding” means a collective judicial or administrative proceeding in a foreign State, including an interim proceeding, pursuant to a law relating to insolvency in which proceeding the assets and affairs of the debtor are subject to control or supervision of a foreign court, for the purpose of reorganisation or liquidation’

Under Art 20.1 of Sch 1 to the CBIR, upon recognition:

‘commencement or continuation of individual actions or individual proceedings concerning the debtor’s assets, rights, obligations or liabilities is stayed [and] execution against the debtor’s assets is stayed…’

Article 20.2(a) of Sch 1 to the CBIR provides that the automatic stay is the same in scope and effect as if the debtor had been made the subject of a winding-up order under the Insolvency Act 1986 (IA 1986). In Cosco Bulk Carrier Company Ltd v Armada Shipping SA [2011] EWHC 216 (Ch) Briggs J said:

‘The domestic regime for the imposition and management of a stay incorporated by paragraph 2 of article 20 is that prescribed by section 130(2) of the Insolvency Act 1986’.

Under Art 6 of Sch 1 to the CBIR:

‘Nothing in this Law prevents the court from refusing to take an action governed by this Law if the action would be manifestly contrary to the public policy of Great Britain or any part of it’

The arbitration in London was, pending the outcome of the application, stayed by consent. An automatic stay would apply under the CBIR, assuming the application was successful, thus explaining Sberbank’s objection to the application.

Opposition to the application

Sberbank, opposing the Company’s application, argued that the extraordinary administration procedure is not a ‘foreign main proceeding’ within Art 2(i) of Sch 1 to the CBIR because:

  • the Extraordinary Administration Law is not a law relating to insolvency
  • the Extraordinary Administration Law was not passed for the purposes of reorganisation or liquidation
  • an extraordinary administration is not a collective proceeding
  • an extraordinary administration is not subject to control or supervision of a foreign court
  • the extraordinary administration concerns a group, and group proceedings are outside the scope of the CBIR
  • even if the extraordinary administration is a foreign main proceeding, to grant recognition would be manifestly contrary to the public policy of Great Britain

The court addressed each of those arguments, with careful reference to the CBIR, the Model Law, documents of UNCITRAL and its working group relating to the preparation of the Model Law, the guide to the enactment of the Model Law (the ‘Guide’), and case-law from the United Kingdom and from other jurisdictions. The court also received expert evidence on matters of Croatian law. The court described its role as to decide whether the extraordinary administration fulfils the criteria for recognition under the CBIR, acknowledging that the characteristics of that proceeding are a matter of Croatian law. It is interesting to note that neither Serbia nor Montenegro was prepared to recognise the Company’s extraordinary administration, notwithstanding that those countries have adopted the Model Law.

Group proceedings out of scope

The Guide makes clear that what is generally being considered in the Model Law is the case of an individual debtor company that undergoes an insolvency or reorganisation process. The position of groups of companies is generally ignored. Whilst the extraordinary administration concerned the Group, recognition was sought only in respect of the Company (we assume being the only group company party to the arbitration proceedings in London). The court held that there is nothing in the CBIR to prevent a foreign proceeding being recognised, which in the foreign court involves a group of companies, but where the recognition being sought in Great Britain is only in relation to a single member of that group of companies.

Law relating to insolvency

The Guide says ‘liquidation and reorganisation might be conducted under a law that is not labelled as insolvency law (eg company law), but which nevertheless deals with or addresses insolvency or financial distress’. The law concerned does not have to be confined to the law of insolvency. The court, having analysed the Extraordinary Administration Law, observed that: ‘It is… clear that the extraordinary administration proceedings in Croatia is begun on grounds either of insolvency or impending insolvency, whether proved or deemed.’ It held that: –– the requirement that the law under which the proceeding is brought must be an insolvency law is satisfied if insolvency (presumed by operation of law or actual) is one of the grounds on which the proceeding could have been commenced, even if insolvency could not actually be demonstrated and there was another basis of commencing the proceeding; and –– it was immaterial, for the purpose of this application, that affiliate and subsidiary companies of the Company could not themselves have been made subject to an insolvency proceeding.

Subject to the control and supervision of the Court

The court was of the view that ‘supervision or control’ is not a demanding standard, and notwithstanding that the Extraordinary Administration Law confers significant powers and oversight upon the government of Croatia (among others), the test was satisfied in this case.

Control or supervision can be potential rather than actual, and indirect rather than direct.

Collective proceeding

Sberbank argued that ‘collective proceeding’ means that the insolvency proceeding must relate to the debtor and its own creditors, and not to creditors of other companies. An extraordinary administration encompasses all the assets and liabilities of the group companies subject to the proceeding, and such claims are administered on an omnibus basis. The extraordinary administrator is tasked with making a proposal between the companies subject to the proceeding and their various creditors. The court held that the proceeding was a collective proceeding, observing, rather tartly, that Sberbank’s objection seemed to be that the extraordinary administration was, if anything, too collective. A distinction was made with a proceeding that is a collection device for a particular creditor or select group of creditors (like a receivership, which is not a collective proceeding).

For the purposes of reorganisation /winding up

Sberbank argued that because a company could exit extraordinary administration without certainty that it would be made subject to a reorganisation or a winding up, such proceeding could not be recognised under the CBIR. The court agreed that as regards the possible outcomes this was right, but held that nonetheless the Extraordinary Administration Law was a law for the purposes of reorganisation and winding-up. Even though a reorganisation or winding up outcome was not certain, it was a credible possibility at the outset of such proceeding.

Manifestly contrary to public policy

The discussion revolved around whether, because an extraordinary administration might result in a distribution to creditors otherwise than in accordance with the pari-passu principle, recognition of an extraordinary administration would, therefore, be manifestly contrary to the public policy of Great Britain. Reference was made to the decisions in Re HIH Casualty and General Insurance Ltd and other companies; McMahon and others v McGrath and another [2008] UKHL 21, Re Bank of Credit and Commerce International SA (No 3) [1993] BCLC 1490 and British Eagle International Airlines Ltd v Compagnie Nationale Air France [1975] 2 All ER 390. The court rejected Sberbank’s argument, saying that the fact that the priorities of the Croatian law in reorganising or winding up are different from those which apply or would apply under English law, is simply not enough. There was no violation of public policy, let alone a manifest violation.

Next steps and comment

In our view, this is a sensible decision and one that ought to help in facilitating an orderly reorganisation of a group of companies that are of immense importance to the Croatian economy. Sberbank’s arguments felt somewhat speculative, but one now wonders whether it will take any further action. It might decide to appeal the judgment (it is interesting to note that in his conclusion Paul Mathews J confessed that ‘[cross-border insolvency] is not a field into which I regularly venture’), or request permission to modify the stay as regards the arbitration proceedings already on foot. In Ronelp Marine Ltd and other companies v STX Offshore & Shipbuilding Co Ltd [2016] All ER (D) 77 (Oct), relying on Art 20.6 of Sch 1 to the CBIR, the automatic stay was modified to permit the continuance of proceedings in the Commercial Court. Under that Article:

‘the court may… modify… such stay and suspension or any part of it, either altogether or for a limited time, on such terms and conditions as the court thinks fit…’

In Ronelp, Norris J said: In cases where the foreign main proceeding is in the nature of a restructuring rather than a liquidation it has become the practice of the English Courts as a matter of discretion to grant the whole of the relief available under paragraph 43 of Schedule B1 [to IA 1986] and to modify the automatic stay to align it with those provisions.’

As mentioned at the outset, unless some means of maintaining in force the Recast EIR, the Recast JR, and other applicable EU legislation can be achieved, or treaties having equivalent effect are put in place, restructuring and insolvency professionals may have to become more imaginative in securing cross-border recognition of insolvency proceedings (and related judgments). The Model Law may become a more popular means of them doing so, rather than having to rely on the uncertain patchwork of private international law. Readers should note however that the Model Law has thus far been adopted by only 43 states worldwide, and by only Greece, Poland, Romania, Slovenia and the United Kingdom (including Gibraltar) in the EU, meaning recognition across the EU would be asymmetrical. Also, unlike the Recast EIR, recognition under the Model Law is not automatic. The Model Law’s applicability will therefore be limited.