When foreign insolvency law trumps English contractual law

When foreign insolvency law trumps English contractual law Marc Florent and Jennifer Marshall 30 May 2012 1

Introduction Eurozone / sovereign debt crisis will lead to a greater number of insolvencies Difficult cross-border insolvency questions arise: what insolvency law or process will apply? will that insolvency law / process be recognised in other jurisdictions? what impact will that insolvency process have on creditors (e.g. ability to enforce judgments, security and set-off)? could that insolvency process seek to discharge English law governed debt e.g. through compromise? All about applicable law and jurisdiction: when does insolvency law trump contractual law? when does insolvency jurisdiction trump contractual jurisdiction clause? 2

All about recognition: but what does this mean? Recognition of insolvency proceedings could mean: acknowledgment that liquidator properly appointed in home member state (but so what?) discretionary (or mandatory) requirement to give assistance / relief to the liquidator in accordance with local law so can collect in local assets (subject to safeguards) assistance / relief in accordance with local or foreign insolvency law recognition of all judgments handed down in insolvency proceedings where analogous local law provisions recognition of all judgments handed down in insolvency proceedings, even where no analogous local law provisions true universalism: all assets in local jurisdiction to be handed to liquidator, with no safeguards and no exceptions 3

So how do you answer these difficult questions? Five sources of English cross-border insolvency law: EC Insolvency Regulation / Winding Up Directives UNCITRAL Model Law on Cross-Border Insolvency / CBIR mutual assistance under section 426 Insolvency Act 1986 Foreign Judgments (Reciprocal Enforcement) Act 1933 common law and principles of comity Possible that all five might apply at once: good for flexibility less good for certainty 4

EC Insolvency Regulation (EIR) Applies if CoMI is in the EU Excludes credit institutions, insurance undertakings and investment firms Directly effective throughout EU so autonomous meaning? Determines: jurisdiction to commence EU insolvency proceedings recognition of insolvency proceedings throughout EU applicable law Main and secondary proceedings Cases still more concerned about CoMI than choice of law Eurofood decision does not seem to have been final word on CoMI 5

Winding Up Directives Directive 2001/24/EC on reorganisation and winding up of credit institutions (not investment firms) Directive 2001/17/EC on reorganisation and winding up of insurance undertakings (not reinsurers) No equivalent directive for investment firms? Not directly effective so need to look at implementing legislation Determines: jurisdiction to commence EEA insolvency proceedings: single set of EEA insolvency proceedings in home member state recognition of insolvency proceedings throughout EEA applicable law Do special resolution regimes fall into definitions of reorganisation measures or winding up proceedings? NB draft framework directive 6

UNCITRAL Model Law Simply about recognition (not jurisdiction) Has to be adopted: Australia (2008); BVI (3003); Canada (2009); Colombia (2006); Eritrea (1998); Great Britain (2006); Greece (2010); Japan (2000); Korea (2006); Mauritius (2009); Mexico (2000); Montenegro (2002); New Zealand (2006); Poland (2003); Romania (2003); Serbia (2004); Slovenia (2007); South Africa (2000); USA (2005) Implemented in UK by Cross Border Insolvency Regulations 2006 (CBIR) Implemented in the US by Chapter 15 of the US Bankruptcy Code Not supposed to be based on reciprocity Main and non-main proceedings (same ideas of CoMI and establishments) Mandatory and discretionary relief Unanswered question: can UK court apply foreign insolvency law? 7

Mutual assistance: section 426 Insolvency Act 1986 English court to assist courts having corresponding jurisdiction in any relevant territory Must be on the list: Rest of UK, Isle of Man, Channel Islands, Anguilla, Australia, Bahamas, Bermuda, Botswana, Brunei, Canada, Cayman Islands, Falkland Islands, Gibraltar, Hong Kong, Ireland, Malaysia, Montserrat, New Zealand, St Helena, South Africa, Turks and Caicos Islands, Tuvula, Virgin Islands Must be a letter of request from foreign court Mandatory or discretionary relief? Court can apply English or foreign insolvency law but must there be an equivalent provision of English insolvency law? Could involve appointment of administrators re foreign company 8

Foreign Judgments (Reciprocal Enforcement) Act 1933 FJA implemented to facilitate reciprocal enforcement of judgments once judgment registered in local jurisdiction Applies to listed jurisdictions: Austria, Belgium, France, Germany, Italy, Netherlands, Norway, Guernsey, Isle of Man, Jersey, Israel, India, Pakistan, Tonga, Suriname, Canada and Australia Only applies to money judgments but wide definition? Not clear whether applies to a judgment arising out of insolvency proceedings: Court of Appeal held yes: New Cap Reinsurance [2011] EWHC 677, even where defendant had not submitted to jurisdiction of foreign court Supreme Court decision awaited 9

Common law Not yet settled as to what role common law still plays Case law not necessarily consistent: depends on particular judge and mood on the day? Tension between: universalism: Cambridge Gas / HIH importance of contractual law: Gibbs v Societe Industrielle et Commerciale des Metaux Only if analogous provisions of English law? Court of Appeal enforced US bankruptcy court judgment under common law in Rubin v Eurofinance SA [2010] EWCA Civ 895 Rubin has now been heard by the Supreme Court, judgment awaited 10

So how does it all fit together? EC Insolvency Regulation prevails over CBIR (but only where there is a conflict) Section 426 prevails over EC Insolvency Regulation (but only where relevant territory is part of commonwealth art.44(3)(b)) Jury is out as to how common law still applies Worse case scenario: Irish company subject to Chapter 11 in Delaware DIP seeks recognition in UK under CBIR on basis that CoMI in Delaware Irish court seeks appointment of UK administrator under section 426 Polish court then decides CoMI is in Poland 11

Example 1: Greek corporate, CoMI in Greece Greek borrower under loan agreement governed by English law English jurisdiction clause Security over assets in UK Under EIR, main insolvency proceedings in Greece Could potentially be secondary proceedings in any place where borrower has establishment Recognition of main insolvency proceedings across EU Hence: stay on proceedings in UK (unless already started) Greek law will determine process for submitting claims in insolvency proceedings likely that any claim would have to be filed in local currency consider article 5 re any security outside of Greece 12

Example 2: enforcement of Australian clawback judgment against creditors in England (New Cap) New Cap in liquidation in Australia Liquidator challenged payments to English creditors as voidable preference No personal jurisdiction over defendants Liquidator sought relief under section 426, FJA and common law Key questions: does section 426 enable foreign liquidator to enforce a clawback judgment where no personal jurisdiction? can this type of judgment be enforced under the FJA? Court of Appeal held yes Supreme Court judgment awaited 13

Example 3: enforcement of US clawback judgment against creditors in England (Rubin) US trust fund in Chapter 11 proceedings Judgment obtained in the US under US clawback rules Question: should English court enforce judgment against parties who had not submitted to the jurisdiction of the US court? Court of Appeal held yes: Chapter 11 proceedings recognised under CBIR judgment part and parcel of Chapter 11 proceedings US and English avoidance provisions very similar Decision reached on the basis of the common law, not under CBIR Supreme Court judgment awaited 14

Example 4: validity of Lehman Brothers flip clause Structured finance documents governed by English law Flip clause in favour of noteholders Valid as a matter of English insolvency law but contrary to US ipso facto provisions CBIR will apply if debtor has its CoMI or an establishment in the US Automatic relief: same stay that would arise in an English winding up Discretionary relief: stay on security enforcement any additional relief that would have been available under English insolvency law but what about application of US bankruptcy law? Consider also common law 15

Example 5: Icelandic bank, English law set-off Icelandic bank owes amount under bond but is owed amount under ISDA English law set-off clause English jurisdiction clause Counterparty wants to set off under English law Under CIWUD, insolvency proceedings must be commenced in Iceland Automatic recognition across EEA But consider whether proceedings fall under CIWUD If so: stay on proceedings in UK (unless already started) prima facie, Icelandic insolvency law governs proceedings should be safe-harbour for set-offs and netting but consider Icelandic law implementation of CIWUD what about claw-back? and matter likely to be heard in Iceland 16

Mini-tutorial on English set-off law Various different types of set-off: only going to deal with contractual and insolvency set-off today Contractual set-off: can be as wide as the parties may agree (including cross-affiliate, acquired claims etc) question of construction of contractual provision Insolvency set-off: two types: liquidation (Rule 4.90) and administration (Rule 2.85) set-off both require mutuality (so no cross-affiliate or acquired claims) automatic and mandatory (so override any contractual provisions that are inconsistent with mandatory rules) liquidation set-off applies as soon as company goes into liquidation administration set-off only applies when administrator gives notice of intention to distribute hence the set-off window use it or lose it approach in administration 17

Conclusions Insolvency law likely to trump contractual law unless there is safeharbour (and even then issues in practice) Insolvency jurisdiction likely to trump jurisdiction clause unless: proceedings already commenced (so get in quick) proceedings not closely connected with insolvency proceedings (and even then issues in practice) Consider where to do legal due diligence when structuring transactions depends on type of entity Consider CoMI reps (or equivalent) but may be of limited use in practice Sadly, each regime is different no one size fits all approach 18

Questions? These are presentation slides only. The information within these slides does not constitute definitive advice and should not be used as the basis for giving definitive advice without checking the primary sources. Allen & Overy means Allen & Overy LLP and/or its affiliated undertakings. The term partner is used to refer to a member of Allen & Overy LLP or an employee or consultant with equivalent standing and qualifications or an individual with equivalent status in one of Allen & Overy LLP's affiliated undertakings. 19