UK: Samsun Logix Corporation / The Cross-Border Insolvency Regulations 2006

Last Updated: 25 March 2009
Article by Richard Baines and Simon Congdon

This briefing outlines the effect of the Order of Mr Justice Morgan in the High Court in England in the matter of Samsun Logix Corporation ("Samsun") on Thursday, 12 March 2009. The effect of the Order is to recognise the primacy of the rehabilitation proceedings commenced by Samsun in its home jurisdiction of Korea. Broadly, the order imposes a moratorium on the commencement and continuation of creditor actions and proceedings against Samsun in Great Britain.

Background

Samsun is a South Korean integrated ship-owner operator and is in serious financial difficulties, owing in excess of US$100 million to creditors, according to evidence filed in the Korean rehabilitation proceedings, which were initiated by Samsun itself by petition to the Seoul Central District Court on 6 February 2009. Subsequently, on the application of the Korean Court-Appointed Receiver, the English High Court made the order to stay proceedings against Samsun in Great Britain, pursuant to its powers granted under the Cross-Border Insolvency Regulations 2006 ("CBIR"). Samsun is reported to be seeking recognition of the Korean rehabilitation proceedings in many other jurisdictions, including the United States (where it has filed for Chapter 15 protection), Australia and China.

Cross-Border Insolvency Regulations 2006

The CBIR deal with the recognition of foreign insolvency proceedings and with the co-ordination and administration of cross-border insolvencies of non-EU companies in Great Britain (meaning in effect England, Wales and Scotland, but not Northern Ireland).

Under the CBIR, a foreign representative administering foreign insolvency proceedings can apply to the English court where the debtor either has a place of business or assets in Great Britain, or if for any other reason Great Britain is the appropriate forum for the recognition of the proceedings.

The Samsun case is believed to be the first occasion that the English courts have used powers granted under the CBIR in order to recognise foreign main insolvency proceedings in respect of a corporate debtor. Recognition of foreign insolvency proceedings as "main proceedings" gives rise to an automatic stay (which is the same as if the debtor had been made the subject of a compulsory winding-up order) which will apply to certain types of creditor actions including: the commencement of proceedings concerning the debtor company's assets, rights, obligations or liabilities; execution against its assets and/or the transfer or disposal of its assets.

The court also has power to grant further relief, which it used in the Samsun case, extending the effect of the stay to prevent the following: any steps to enforce any security over the debtor company's assets; any legal process against it; the appointment of any administrative receiver; and/or any order for winding up being made against it. This means the moratorium in the Samsun case is similar to that imposed in an administration.

Comment

The Samsun case is highly significant as it is the beginning of a new regime and a step change in the approach of the English courts to foreign insolvency proceedings instituted in countries outside the EU.

Under English law the courts here have long recognised properly appointed foreign insolvency office-holders and had power to assist insolvency office-holders from other jurisdictions at Common Law with former Commonwealth countries benefiting from the special regime under the Section 426 Insolvency Act. Now, by virtue of the CBIR the English courts will be able to give recognition and assistance to insolvency office-holders from any jurisdiction in the world, whilst the existing regimes will remain available in parallel. Broadly, the position is now more certain and there is a special procedure in place which foreign office-holders can more easily implement.

The CBIR are based on the Model Law on cross-border insolvency adopted by the UN Commission on International Trade Law on 30 May 1997. The effect of the CBIR is that foreign insolvency proceedings will be recognised by the courts here without the need for any reciprocal treaty arrangements. Unusually, the CBIR applies in "Great Britain" and refers to "British Insolvency Law" which is defined as being (broadly) the insolvency law of England & Wales and Scotland. There is equivalent legislation in force in Northern Ireland. The UNCITRAL Model Law has been implemented in countries around the world including Australia, Korea, Japan, Mexico, South Africa and the USA. It does not apply to EU Member States, as to which the EC Regulation on Insolvency Proceedings applies. Thus, the CBIR forms part of a raft of measures designed to give cross-border effect to the rulings of competent courts in different jurisdictions around the globe.

The nature of the moratorium or stay in insolvency proceedings is often misunderstood. In an English liquidation, its purpose is to stop the race amongst creditors (i.e. the first to execute scoops the pool) and to avoid the expense of litigation. English law therefore provides for a bar to come down, for claims to be valued through a swift and economical method of assessment and for the proceeds of the assets of the company to be distributed equitably amongst those entitled to them in the order of their priority. In an administration, which Samsun's Korean rehabilitation appears to resemble more closely, the reason is more to enable the company's business to survive as a going concern by stopping its creditors from destroying it by seizing its assets and selling them to satisfy its debts.

The court has a discretion to allow a party to pursue its claim in litigation/ arbitration, on such terms as it may impose. Good reasons for doing this include: that the summary method of determination under an insolvency regime is inappropriate given the nature of the dispute; the state the proceedings have reached; and the fact that they will have no effect on the insolvency (e.g. because there is security). Each case will turn on its own facts.

We anticipate that the English court will be sympathetic to the Korean receiver and will want to assist the foreign insolvency process. There is very strong judicial policy to this effect. Given that the order was made without notice, it is no doubt open to someone affected by it to apply to set it aside and indeed there is specific provision for this in the CBIR. Recognition, however, is automatic once certain fairly basic entry level criteria have been met.

It is important to note that "main proceedings" are defined as those which constitute a foreign insolvency proceeding taking place in the state where the debtor has the centre of its main interests ("COMI"). COMI is not defined in the CBIR, but it is subject to the rebuttable presumption that it is the place in which the registered office of the company is located. There is a fair amount of case law on this issue but it arises in connection with the EC Regulation of Insolvency Proceedings, in which the concept of COMI is also employed.

Who is affected by this Judgment ?

  • Creditors (both secured and unsecured) of Samsun with English law claims, as the moratorium will stay all legal proceedings including arbitration proceedings.
  • Creditors of distressed foreign companies with business, assets and/ or other connection with Great Britain.
  • Insolvency office-holders, banks and others involved in cross-border restructuring and insolvency work.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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