Effect of cross-border insolvency on contractual time bar
16 February 2015
In Bank of Tokyo-Mitsubishi UFJ Ltd v Owners of the MV Sanko Mineral  EWHC 3927 it was held that, as a matter of English law, a claimant should have commenced arbitration within 12 months, in accordance with contractual provisions, in order to preserve its claim even when the debtor was subject to foreign insolvency proceedings. In such circumstances, whether the claim would be accepted in the foreign insolvency proceedings was a matter for the law governing those insolvency proceedings.
Glencore Limited (Glencore) was the owner of cargo contracted to be carried by the MV Sanko Mineral (the Vessel). The contract for carriage contained an arbitration clause that required an arbitrator to be appointed within 12 months of final discharge of the cargo and that any claim would become time-barred if this was not complied with.
The defendant, the former owner of the Vessel, was placed into Japanese reorganisation proceedings (the Reorganisation Proceedings). The Reorganisation Proceedings were recognised by the English courts as "foreign main proceedings" pursuant to the Cross-Border Insolvency Regulations 2006 (the Regulations). Glencore submitted claims in respect of the contract of carriage (both secured and unsecured) in the Reorganisation Proceedings but did not commence arbitration proceedings within 12 months of the cargo's discharge as required by contract.
The claimant bank held a mortgage over the Vessel. Pursuant to the mortgage, the Vessel was ordered to be sold by the English courts, however Glencore applied for the issue of a caution against the release of the proceeds of the sale arguing that it held a security interest over the Vessel under Japanese law, pursuant to its rights under the contract for carriage. The defendant applied for the strike out or withdrawal of the caution on the basis that, as a result of the non-compliance with the arbitration clause, Glencore's claim was contractually time-barred.
Context: effect of insolvency on contemplated or pending litigation
The key issue for the court was whether a contractual time bar which requires a claimant to commence arbitration within a particular time frame is displaced by a debtor's foreign insolvency proceedings (or the recognition of those proceedings under the Regulations).
The Regulations implement the UNCITRAL Model Law on Cross-Border Insolvency in Great Britain. The Regulations allow the English courts to recognise certain foreign insolvency proceedings and, as a result of such recognition, provide certain relief in aid of those proceedings.
Under the Regulations, upon the recognition by the English courts of "foreign main proceedings", an automatic stay arises which, among other things, prevents the commencement or continuation of actions or proceedings concerning a debtor's assets or liabilities. The court order recognising the Reorganisation Proceedings confirmed that the automatic stay would prevent the commencement of arbitration proceedings. Article 20(4) of the Regulations provides that the automatic stay does not affect the right of a creditor to commence proceedings to the extent necessary to preserve a claim against the debtor. Further, it is possible to seek the permission of the English court to commence or continue proceedings which would otherwise be barred by the automatic stay.
Glencore argued that the submission of its claims in the Reorganisation Proceedings meant that its claim had not become barred because of the non compliance with the arbitration clause. Glencore argued that the existence of foreign insolvency proceedings had displaced the agreed dispute resolution procedure.
Teare J held that where a contractual time bar provision requires arbitration to be commenced in order to preserve a claim, failing which the claim is absolutely barred, that provision must be complied with. The opening of foreign insolvency proceedings does not displace this obligation and neither does the recognition of those foreign insolvency proceedings by the English court, pursuant to the Regulations, as foreign main proceedings. It was held that the English court's recognition of foreign insolvency proceedings as foreign main proceedings did not displace a contractual time bar as, despite the existence of the automatic stay on proceedings, Article 20(4) of the Regulations permits proceedings to be taken to the extent necessary to preserve a claim. As such, under the Regulations, Glencore could have commenced arbitration proceedings in London in order to comply with the contractual dispute resolution provisions. Further, if Article 20(4) did not allow arbitration proceedings to be commenced (which the court was of the view was not the case) then Glencore could have applied to court for leave to commence the arbitration proceedings.
It was held that, absent the recognition of the Reorganisation Proceedings in England under the Regulations, the decision that the claim was absolutely barred would lead to an order for the payment of the proceeds of the sale to the trustee in the Reorganisation Proceedings (the Trustee). However, given the recognition of the Reorganisation Proceedings, the English court would not make an order which may hinder the proper working of the Reorganisation Proceedings. As Glencore had filed a claim in the Reorganisation Proceedings it was a matter of Japanese law whether such a claim was valid and would be accepted in the Reorganisation Proceedings and this fact needed to be respected by the English court. Accordingly, as under Japanese law it was possible that Glencore had a claim in respect of the proceeds of the sale of the Vessel, the English court would only order payment out on the agreement that the Trustee kept the proceeds of the sale in a separate account and held to the order of the Japanese court.
This case provides a warning to creditors of the importance of adhering to contractual dispute resolution procedures in order to protect claims, even where the debtor has been placed into foreign insolvency proceedings. The existence of the foreign insolvency proceedings (and any recognition of those proceedings in England) may mean that there is a stay on bringing the relevant legal proceedings in England, therefore, advice should be sought to determine whether this is the case and whether there is a procedure for lifting the stay to allow proceedings to be commenced. Further, while the filing of a claim in the foreign insolvency proceedings may mean that non-compliance with the relevant contractual provisions does not lead to the claim being extinguished, whether the claim is extinguished will be determined by the law governing the foreign insolvency proceedings and so relevant local law advice should be obtained.