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Ability to litigate in England torpedoed by foreign insolvency proceedings - Erste Group Bank AG v JSC “VMZ Red October”

The filing of claims by a creditor in foreign insolvency proceedings, and the full participation of the creditor in those proceedings, results in the submission to and acceptance of the jurisdiction of the foreign courts in relation to all issues arising in the insolvency proceedings. Creditors should therefore consider very carefully the consequences of filing claims in foreign insolvency proceedings (and/or participating in the foreign insolvency proceedings) as doing so may have unintended consequences.

Background

In Rubin/NewCap (click here for our bulletin) in the context of considering whether certain foreign judgments made in the insolvency context were enforceable in England, the UK Supreme Court held that, by filing a claim in the foreign insolvency proceedings, a creditor submits to the jurisdiction of the foreign insolvency court. However, the High Court in Red October had cast some doubt upon whether filing such a claim would, in circumstances other than those considered in Rubin/New Cap, result in submission to the jurisdiction of the foreign insolvency court. The High Court indicated that the filing of a claim in foreign insolvency proceedings may not always result in the submission to the jurisdiction of the foreign courts (for example, if the foreign insolvency proceedings have not been recognised in England and/or filing a claim in the foreign insolvency proceedings has different effects than would be the case in English insolvency proceedings). Further, following the above decisions, questions had arisen in practice as to whether, by filing a claim, a creditor would submit to the jurisdiction of the foreign insolvency court for insolvency derived matters only and not matters governed by the general law.

The Red October insolvency proceedings

Russian insolvency proceedings were commenced in respect of the Russian incorporated Red October steel company and Red October’s Russian incorporated parent. A lender to Red October filed claims in the insolvency proceedings (against Red October on the basis of an English law governed loan agreement and the parent on the basis of an English law governed guarantee – both agreements were subject to the exclusive jurisdiction of the English courts). It was alleged by the lender that various companies in the Red October group had engaged in a conspiracy to hive down Russian assets to a subsidiary and to put assets out of reach of creditors. On this basis, the lender sought to bring legal proceedings before the English courts against Red October, the parent and the related companies that were allegedly involved in the alleged conspiracy. The Russian insolvency proceedings had not been recognised in England and no application for recognition had been made. The High Court allowed service out of the jurisdiction on the related companies (it was not necessary to obtain permission to serve out on Red October or its parent). Two of the related companies challenged jurisdiction, seeking to set aside the service of proceedings upon them. They lost their challenge in the High Court but appealed to the Court of Appeal.

One of the three jurisdictional gateways relied upon by the lender to obtain permission to serve out of the jurisdiction had required the lender to show that there was a real issue between the lender and Red October (and its parent) which it was reasonable for the English court to try and that the related companies were necessary or proper parties to the proceedings. The appellant companies argued before the Court of Appeal that there was not a real issue between the lender and Red October or its parent that it was reasonable for the English court to try.

The Court of Appeal held (on the basis of the decision of the Supreme Court in Rubin/New Cap and the Privy Council in Stichting Shell Pensioenfolds v Krys) that, in the context of considering whether it was reasonable for the English court to try the claim against Red October and its parent, the filing of claims by the lender (and the subsequent participation in the insolvency proceedings) amounted to a submission to and acceptance of the jurisdiction of the Russian courts by the lender in relation to all issues arising in the insolvencies. In this case, this included both claims which were derived from the insolvency proceedings (ie those brought under the relevant insolvency legislation – essentially claims which only arise because of the opening of insolvency proceedings) and claims under the general law (ie the tortious claims for conspiracy), because there was no relevant difference between the claims for which the lender proved and the claims for which it did not prove. As such, it was not reasonable for the English court to try the claim between the lender and Red October and its parent and therefore not appropriate to give permission to serve out of the jurisdiction on the related companies.

The Court of Appeal further held that, irrespective of whether the lender had submitted to the Russian proceedings, there was no real issue that it was reasonable for the court to try as between the lender and Red October and its parent for a number of other reasons, including that there was no suggestion that the contractual indebtedness of Red October was being disputed and there was no utility in hearing the claims when any judgment would either not change the recovery in or have no effect in the Russian insolvency process. Further, the Court of Appeal found that the fact that Red October and its parent were bound by English jurisdiction clauses in the relevant documents did not predicate that it would be reasonable for the court to try such claims. The English court clearly had jurisdiction over the claims against Red October and its parent which, in the absence of any submission, it would probably accept. But the question was not whether the court should or was obliged to accept jurisdiction, rather, in the context of an application for permission to serve out of the jurisdiction on third parties, the question was whether, in all the circumstances, it was reasonable to try such claims against the “anchor” defendants. Here it was not. The Court of Appeal therefore allowed the appeal and set aside the service out of the jurisdiction.

Essentially the court viewed the lender as having made a choice by the filing of claims in the Russian insolvency proceedings. The court also pointed to the fact that the lender had: (i) taken part in creditors’ meetings; (ii) been represented in the court proceedings determining whether the guarantee would be voided on the basis of Russian law; and (iii) comprehensively engaged with the Russian officeholder. As the court put it the lender’s participation in the Russian insolvency proceedings had been “full-blooded”.

The Court of Appeal also rejected the lender’s attempts to rely on other jurisdictional gateways and, in considering its general discretion to determine whether England was the appropriate forum, found that there was no doubt that the clearly appropriate forum for the determination of the dispute was Russia.

What does this mean?

While the lender had done far more than simply file a claim in the Russian insolvency proceedings, it is now clear that filing a claim in any jurisdiction’s insolvency proceedings: (i) will result in submission to the jurisdiction in relation to the enforcement of claims that the creditor may have against the assets of the insolvent party; and (ii) that this will cover claims in respect of which a creditor did not prove. Furthermore, by filing a claim in the insolvency proceedings and then participating fully in insolvency proceedings, the creditor may be taken to have submitted to the jurisdiction of those courts in relation to all issues arising in the insolvency proceedings. Creditors should therefore seek legal advice before taking any step in respect of foreign insolvency proceedings. By taking such a step a creditor could waive its rights to have a wide range of connected issues determined by the English court.

The Court of Appeal confirmed that it may be possible for a creditor, in respect of claims which are not derived from the foreign insolvency proceedings, to apply to the English court in appropriate circumstances for a determination of issues governed by English law. Such a decision could then assist the foreign insolvency court in establishing whether there is a debt which is capable of being proved. This option was rejected by the Court of Appeal in Red October because the court was of the view that such an order from the English courts would be of no utility, the question of the quantum and validity of the claims filed in the Russian insolvency proceedings by the lender having already been determined by the Russian courts. There may therefore be some merit for parties to seek to “get in early” before the English courts; although whether such action will be beneficial will be highly fact specific.

The decision does not consider the effect that having a “presence” in the jurisdiction of the foreign insolvency proceedings may have. The question for the courts in the future may be whether, by having a presence in the jurisdiction of the foreign insolvency proceedings, the party has “submitted” to the jurisdiction of the foreign insolvency courts, simply because of its activities in the State where the foreign insolvency proceedings have been commenced (even if the party has taken no step at all in respect of the foreign insolvency proceedings). The question that would then arise is whether it should be taken to have submitted in relation to all issues in those proceedings, or only for the purposes of seeking to enforce its claims against the assets of the insolvent estate.

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