Mr Justice Norris :
- Atlas Bulk Shipping A/S ("Atlas Bulk") was incorporated in Denmark and carried on business as a shipping company. Amongst the entities to whom it and its associated companies chartered ships were members of the Navios Group. Companies which are active in the physical market of actually chartering vessels for future engagements also participate in a paper futures market as a means of hedging commercial risks arising from the volatility of freight rates. This is achieved by entering into Forward Freight Agreements (FFAs). One of the standard forms of FFA is one which incorporates the provisions of the Forward Freight Agreement Brokers Association 2007 Terms, which themselves incorporate by reference the provisions of the International Swaps and Derivatives Association 1992 Master Agreement. An FFA is a form of derivative contract operating by reference to identified rates priced according to the Baltic Exchange index.
- In March, June and July 2008 Atlas Bulk entered into three FFAs where the counter party was Navios International Inc. ("Navios"). I will refer to these as "the Bulk FFAs". Prior to the Bulk FFAs there had been an earlier transaction: in October 2007 Navios had entered into an FFA with an affiliate of Atlas Bulk, namely Atlas Shipping A/S ("Atlas Shipping"). I will refer to this transaction as "the Shipping FFA". Both the Bulk FFAs and the Shipping FFA were by their terms governed by English law and subject to the exclusive jurisdiction of the High Court.
- On 17 December 2008 Atlas Bulk filed a bankruptcy petition with the Danish court under the Danish Bankruptcy Act 1997. On 18 December 2008 the Danish court made a bankruptcy order and appointed Lisa Bo Larsen and Michael Ziegler to be the company's bankruptcy trustees. The effect of the order was to commence bankruptcy proceedings. It also constituted an event of default under the ISDA 1992 Master Agreement incorporated into each of the FFAs. This meant that under the FFABA 2007 terms the FFAs became subject to automatic early termination. Upon automatic termination the gain or loss in connection with the transaction fell to be calculated according to the machinery incorporated into each of the FFAs. Doing these calculations established that Navios had made a loss of $4,230,742 on two of the Bulk FFAs, and a gain of $2,092,121 on the third. Setting the gains and losses off against one another left a balance due from Navios to Atlas Bulk in the sum of $2,138,621. Doing the calculation in relation to the Shipping FFA showed that Atlas Shipping owed Navios $1,516,994.
- Navios did not pay the sum it owed to Atlas Bulk. It was therefore necessary for proceedings to be commenced. Because of the governing law and jurisdiction clauses in the FFAs these proceedings had to be brought in England and Wales. They were commenced by Atlas Bulk in the Commercial Court on 9 March 2010. In its Amended Defence and Counterclaim Navios did not challenge the calculation of the sums claimed or the terms of the documents themselves. But it claimed that it was not liable to pay because it was entitled to exercise two rights of set-off.
- The first (which I will call "the non-mutual set-off argument") was that Navios could set off against the sum which it owed to Atlas Bulk under the Bulk FFAs the sum that it was owed by Atlas Shipping under the Shipping FFA. Shortly put, the basis for this argument was:-
(a) That Atlas Bulk and Atlas Shipping had represented by conduct that Navios would have the option to net off payments irrespective of the company to which those payments were strictly due, and that Navios had acted upon that representation by entering into the Bulk FFAs:
(b) That there was a collateral contract which gave Navios the option to net off payments as between Atlas Bulk and Atlas Shipping:
(c) That Atlas Bulk was estopped by representation and by convention from arguing against non-mutual set-off: alternatively
(d) That Atlas Bulk was not entitled to enforce the Bulk FFAs because Navios had entered upon them as the result of a unilateral mistake which Atlas Bulk knew that Navios was making.
- I agree with Counsel for Navios that this is not the occasion upon which to examine the merits of the non-mutual set-off arguments. For the purposes of this judgment I will assume that the argument has a solid factual foundation and is sound in law.
- The second set-off relied upon (which I will call "the post-insolvency assignment argument") was based upon a transaction which took place after Atlas Shipping became bankrupt. A company called Global Maritime Investments Ltd ("GMI") claimed to have entered into an FFA with Atlas Bulk on 8 May 2008 under which Atlas Bulk owed to GMI a debt of $2,020,088. On 25 June 2010 GMI assigned this claim to Navios for $500,000. Of course Navios did not want to take ownership of this debt in order to claim in the bankruptcy of Atlas Bulk the dividend that would otherwise have been payable to GMI: what Atlas Bulk wanted was to set-off its claim under the debt against the money which it owed to Atlas Bulk (and thereby benefit dollar for dollar from the ownership of the GMI debt).
- The set-offs claimed are not bankruptcy set-offs, but legal set-offs (to be given full effect when claim and set-off merge in the judgment). But both the non-mutual set-off argument and the post-insolvency assignment argument are being advanced against a claimant which, as the title to the action in the Commercial Court discloses, is insolvent.
- Under the insolvency law of Denmark neither the non-mutual set-off argument nor the post-insolvency assignment argument could succeed. Under the Danish Bankruptcy Act 2007 only bilateral set-off is permitted; and, apart from insolvency law, the same principle is embodied in the "close-out netting" rules applicable under the Danish Securities Trading Act 2010. Furthermore, the estoppel arguments (in all forms) and the oral collateral contract argument would fail on the technical ground that under that Act all netting agreements must be in writing in order to be enforceable. The post-insolvency assignment argument would fail in Denmark because under the Danish Bankruptcy Act 2007 a claim acquired by assignment later than three months before the filing of the bankruptcy petition cannot be applied by way of set-off. But both arguments are being deployed in the context of proceedings in the English Commercial Court, not in the context of a Danish insolvency.
- Under English insolvency law neither the non-mutual set-off argument nor the post-insolvency assignment argument could succeed. The law to be applied would be that deriving from British Eagle v Air France [1975] 1 WLR 758 and that contained in Rule 4.90 of the Insolvency Rules 1986 ("IR 1986"). This provides only for bilateral set-off and excludes any right of set-off in respect of claims acquired by assignment after the commencement of the winding up. But the arguments are being deployed by way of defence to proceedings brought in the English Commercial Court and there is no English insolvency.
- The question in the present case is whether, by virtue of the jurisdiction clause in the standard form FFA, a party to an FFA can exercise or acquire commercial rights that would not be available to it under the insolvency law governing the bankruptcy of the relevant party to the FFA whose bankruptcy created the relevant liabilities, or under the insolvency law of the jurisdiction in which the claims are to be enforced under the terms of the FFA.
- Recognising that there was a mismatch between the insolvency jurisdiction and law and the enforcement jurisdiction and law the trustees of Atlas Bulk seek to interrelate the two.
- As trustees of the bankruptcy of Atlas Bulk in Denmark Ms Larsen and Mr Ziegler are "foreign representatives" within Article 2(j) of Schedule 1 to the Cross Border Insolvency Regulations 2006 ("CBIR"). They therefore applied to the High Court for recognition of the Danish bankruptcy (which qualifies as a collective judicial proceeding under a law relating to insolvency in which the assets and affairs of Atlas Bulk are subject to the supervision of the Danish court for the purpose of reorganisation or liquidation). Being satisfied that the formal requirements of Article 15 were satisfied, I indicated at the conclusion of the hearing that I would, in compliance with Article 17.1 of the CBIR, recognise the Danish bankruptcy and would accept that it is "a foreign main proceeding" within Article 17.2. About that there was no controversy. The argument centred upon consequential matters.
- By Article 20 of CBIR "upon recognition" certain consequences automatically follow. The continuation of individual actions concerning the assets, obligations or liabilities of Atlas Bulk is stayed, execution is stayed and the right to dispose of any assets is suspended (Article 20(1)) exactly as if Atlas Bulk had been made the subject of a winding up order under the Insolvency Act 1986 ("the 1986 Act") and s.130(2) applied. But by Article 20(3) the stay and suspension does not automatically affect any right of a creditor such as Navios to set-off its claim against a claim of Atlas Bulk, being a right which would have been exercisable if Atlas Bulk had been made the subject of a winding up order under the 1986 Act. The court has a power (under Article 20(6)) to modify or terminate the stay or suspension (either altogether or for a limited time) on such terms as the court thinks fit.
- This is a forward-looking provision. It does not apply English law to the Danish insolvency or create a notional English insolvency. As from recognition it automatically creates a moratorium and makes available to the Danish office holder in the English courts the remedies that would be available to an English office holder as regards actions against, execution in respect of and disposal of the property of Atlas Bulk.
- The effect of Article 20 is to stay Navios' Counterclaim in the Commercial Court. But what of its reliance upon the set-offs as a defence? Staying the Counterclaim does not prevent reliance on the legal set-off as defence (Langley Construction v Wells [1969] 2 All ER 46) except to the extent that the mandatory and automatic bankruptcy set-off under IR 4.90 arises. At the very least an English office holder would be able to say that if a winding up order had been made under the 1986 Act at the same time or immediately before the "recognition" order then in relation to set-off claims that had not at that point been exercised, Insolvency Rule 4.90 would mean that neither a non-mutual set-off nor a set-off founded upon a post-insolvency assignment could thereafter be enforced.
- I say that such is "at least" the position for two reasons. First, in limiting the extent of the moratorium paragraphs (2) and (3) of Article 20 say that it has the same scope and effect as if Atlas Bulk "had been made" the subject of a winding up order. The provisions do not say "had on the date of the recognition order been made" the subject of a winding up order. There is no explicit assumption about the date upon which Atlas Bulk is (for the purpose of defining the scope and extent of the stay) to be assumed to have been subject to a winding up order. Secondly, Rule 4.90 itself reaches back beyond the winding up order itself. It reaches back to the time when the party seeking to enforce the set-off "had notice that a petition for the winding up of the company was pending" (IR 4.90(2)(b)(ii) and (2)(d)(iii)).
- Accordingly, the Danish office holders are at the least entitled to a declaration that as from the date of the recognition order Navios is not entitled to seek to enforce any (yet to be enforced) set-off :-
(a) In respect of the Shipping FFA under the non-mutual set-off argument: and
(b) In respect of the GMI FFA under the post-assignment set-off argument.
- But what the foreign representatives seek is something more far reaching. They do not rely on Article 20. Article 21 CBIR confers on the English court a discretionary power to grant appropriate relief "where necessary to protect the assets of the debtor or the interests of the creditors". This "appropriate relief" includes any relief that may be available to an English office holder under the law of England and Wales. In paragraph 13(b) of their Application Notice the Danish representatives seek an order under Article 21 that Navios may not rely on the paragraphs in its Amended Defence and Counterclaim in the Commercial Court proceedings which plead the non-mutual set-off and the post-insolvency assignment set-off. The object is that I should by order prevent Navios from relying by way of defence to the claim under the Atlas Bulk FFAs upon either of those two set-offs even if they have purported to exercise them. Navios makes a cross application to the opposite effect.
- The Danish bankruptcy is a foreign (main) proceeding. I can accordingly consider exercising the Article 21(1)(g) power if:-
(a) I am satisfied that it is necessary to protect the assets of Atlas Bulk or the interests of the creditors (which I hold to mean the interests of the general body of creditors as a whole) (see Article 21(1)): and
(b) I am satisfied that the interests of the creditors and other interested persons (including, if appropriate, Atlas Bulk) are adequately protected (see Article 22(1)).
- It is common ground between the parties that recognition does not of itself prejudice rights of set-off exercisable in an English winding up under IR 4.90. But the parties differ as to the date upon which those rights are to be ascertained. The Danish representatives say that those rights are to be determined as at 17 December 2008 (the effective date of presentation of the Danish bankruptcy petition): although they have not carried the logic of that argument through to Article 20 itself. Navios says that the rights are to be determined by reference to a notional winding up order made at the same time as the recognition order.
- In my judgment whatever may be the position under Article 20, in the context of Article 21 the position contended for by the Danish representatives is to be preferred. I hold that the English court has (when considering what relief by available to an English office holder under Article 21(1)(g)) power to restrain or to undo the purported exercise of set-off rights after the commencement of the Danish insolvency.
- These are my reasons for that view:-
(a) The scope of Article 21 is plainly greater than that of Article 20. Article 21(1)(a)-(c) empowers the court to stay or suspend proceedings to the extent that they have not been stayed or suspended under Article 20.
(b) Article 21 deals with a discretionary power that is only exercisable after all relevant interests have been taken into account: whereas Article 20 is automatic in effect, and a consideration of all relevant interests only occurs if the otherwise automatic consequences are sought to be modified in some respect under Article 20(6). So there is every reason to give Article 21 a broad scope.
(c) The fact that Article 21 begins with the words "upon recognition" simply defines the date from which relief may be afforded by the English court. It does not necessarily determine the date by reference to which the rights (in respect of which relief is to be afforded) are to be identified.
(d) The CBIR do not proceed on the footing that there is a notional English winding up as at the date of the recognition order. That is demonstrated by Article 23. This offers to the foreign representatives as available relief the anti-avoidance provisions contained in specified sections of the 1986 Act, but with modifications. The modifications all have the effect of making the opening of the relevant foreign proceedings (i.e. the date of the Danish bankruptcy petition) the relevant date for the determination of the rights arising under those provisions.
(e) The mere fact that there is no similar express modification of section 127 of the 1986 Act or IR 4.90 does not seem to me to be determinative. In my judgment the court must seek to construe the CBIR as a coherent whole, mindful of its objective, its origin and the global application of its template. The Preamble to the Model Law explains that:-
"The purpose of this Law is to provide effective mechanisms for dealing with cases of cross-border insolvency so as to promote the objectives of:-
(c) Fair and efficient administration of cross-border insolvencies that protects the interests of all creditors and other interested persons including the debtor
(d) Protection and maximization of the value of the debtor's assets.."
If the material date for setting aside dispositions of property is the date of the opening of the foreign proceedings then I consider that the same date is relevant for setting aside contractual set-off provisions (if the relevant words of the CBIR can be properly so construed). Both are concerned with getting assets in to the estate (property in the one case and debts in the other). It would I think be equally odd if for the purpose of getting in assets the relevant date is the date of the Danish petition but for the purposes of distribution (whether Navios gets a dividend or is entitled to 100p in the £1 by way of set-off) the relevant date is that of the recognition order. Construing the CBIR so as to give the court power (if it thinks fit) to control the exercise of set-off claims and the trafficking in set-off claims seems consistent with the purpose of the Law and coherent with the anti-avoidance provisions.
(f) Furthermore, I consider that treating the relief available to the foreign representative under Article 21(1)(g) as including that which would be available to an English office holder in respect of insolvency proceedings commenced on the date of the opening of the foreign proceedings is consistent with the object of the article as apparent from the travaux preparatoires. The recognition of the foreign insolvency proceedings appears to have been intended to have in the recognising state the same effect as if the insolvency proceeding had been opened in the recognising state (subject to identified exceptions): see paragraph 48 of the Report of the UNCITRAL Working Group on Insolvency entitled "Possible Issues Relating to Judicial Co-operation and Access and Recognition in cases of Cross Border Insolvency" (26 September 1995 A/CN.9/WG.V/WP42). I of course accept that the drafting process from time to time encapsulated this principle in a various suggested ways and with differing emphases: but the principle itself was always embodied. It is the principle which also underlies the requirement in Article 27 to co-operate to the maximum extent possible with the foreign court and the foreign representatives to co-ordinate the administration and supervision of the debtor's assets and affairs.
(g) Counsel for Navios argued that if one read Article 21(1)(g) as permitting the foreign representative to apply for such relief as would have been available to his English counterpart in an insolvency commencing on the date of the opening of the foreign proceedings then uncertainty was introduced because differing jurisdictions may have different laws concerning "relation back" and differing conditions for set-off, so that there was no certain "datum point". I agree that reading Article 21 in the sense I prefer introduces a measure of complication not present if one takes the date of the recognition order as the "bright line" for absolutely all purposes. But my reading is more consistent with what I regard as the underlying policy of the Model Law (embodied in the CBIR) to be: as expressed in paragraph 20(b) of the UNCITRAL "Guide to Enactment" it is that:-
"[It] presents to enacting States the possibility of aligning the relief resulting from recognition of a foreign proceeding with the relief available in a comparable proceeding in the national law".
(h) Counsel for Navios suggested that it was the policy of the UNCITRAL Model Law and of the CBIR that applications for recognition should be made promptly and that this policy would be reinforced by treating the date of the recognition order as not only the date after which relief could be granted but also as the date by reference to which rights were to be determined: and correspondingly that the alternative reading would undermine this policy. I do not regard this argument as persuasive. Delay in making the application is plainly a material factor in considering the exercise of the discretion to grant relief: but it is not relevant to the determination of the scope of the jurisdiction.
(i) Indeed, relating the opening of the insolvency proceedings to the time of the recognition application tends to support the interpretation which I favour. The September 1995 Working Group Report to which I referred spoke (in paragraphs 15 and 16) of one of the needs being addressed as:-
"[the needs of]….unsecured creditors, whose return on the debts owed to them would be maximized to the extent cross-border co-operation could be instituted as a replacement for "the race to the courthouse"…."
On the reading favoured by Navios there would be every incentive for some unsecured creditors (upon the opening of insolvency proceedings) to exercise every available set-off and to traffic in claims to create further set-offs in a scramble to reduce the amount they had to contribute to the estate and to increase the amount they recovered on their own claims before a recognition order was made, to the prejudice of other members of the same class. On the reading I favour they could pursue such a commercial strategy (see Glencore Grain v Agros Trading [1999] 2 All ER (Comm) 288) but at the risk of the foreign representatives obtaining an order under Article 21(1)(g) depriving them of the benefit of their efforts if it was necessary to protect the assets of the debtor or the interests of the creditors and proper under Article 22.
(j) Counsel for Navios argued that to permit the foreign representative to seek relief on the footing that set-off rights were determined at the date of the insolvency (not at the date of the recognition order) would be retrospectively to alter the legal effect and consequence of the acquisition and exercise of rights of set-off that undeniably existed before recognition was sought. To an extent this is right, in the same way that section 127 or the avoidance provisions directed at acts detrimental to creditors and IR 4.90 itself also act retrospectively. But as Professor Fletcher put it in "The Law of Insolvency" (4th ed) (cited in Rubin (post)):-
"In this examination of the effects of the winding-up on the rights of creditors and other parties, it is as well to recall that the fundamental principle upon which the winding-up is based is the collective nature of the proceedings. The objective underlying the relevant legal provisions is to ensure that an orderly regime is imposed upon all interested parties so that none of them individually may enhance his position by exploiting some fortuitous circumstance which may yield and unfair advantage.."
(k) So there are two answers to the objection. First, if Article 21(1)(g) means what I think it means then the acquired rights were always "flawed" rights: any contractual or procedural rights were always liable to be affected by the onset or existence of insolvency (as indeed is always the case). Second, the discretionary nature of the relief under Article 21(1)(g) ensures that the provision does not operate unfairly, and that Navios is able to use its indebtedness to Atlas Bulk as security to the extent that it is just to do so, but no more.
- For these reasons I consider that the rights in respect of which relief may be granted under Article 21(1)(g) are to be determined by reference to the date of the opening of the foreign proceedings. This means that the non-mutual set-off and the post-insolvency assignment set-off are not immune from attack. On that reading of Article 21(1)(g) the questions are whether the threshold of necessity is crossed: and whether as a matter of discretion relief ought to be granted.
- I intend to address those questions together since it must be a rare case in which the court forms the view that the grant of relief is necessary to protect the assets of the debtor or the interests of the creditors but yet as a matter of discretion withholds relief. Circumstances equivalent to those recognised by the equitable doctrine of laches may perhaps be one such case.
- I am satisfied that it is necessary for the protection of the assets of the debtor and in the interests of the general body of creditors as a whole that I should declare that Navios may not, by way of defence in the Commercial Court action, rely on set-offs arising under either the non-mutual set off argument or the post-insolvency assignment argument. Set-off operates contrary to the general principle of pari passu distribution which applies upon insolvency. Navios contracted with a Danish entity. The Danish bankruptcy law recognises the principle of equal distribution and strikes a balance between the interests of the person having a claim capable of amounting to a set-off and the interests of the general body of creditors. Those who contract with a Danish entity might expect that balance to govern their relationships inter se when insolvency supervenes. The only reason it does not do so automatically in the present case is that the fortuitous circumstance that the FFAs happen to be governed by English law and justiciable in England. But English law in fact strikes the same balance. The public policy of Denmark and England both say that non-mutual set-offs and post-insolvency assignment set-offs do not hold good against the general body of creditors, and the assets of the debtor and the interests of the general body of unsecured creditors are to be protected accordingly. There is no reason why the recognising Court in England should not regard as "necessary" the protection which both Danish and English law afford to the general body of creditors.
- I see no reason in discretion for withholding this relief. It is true (as Navios submitted) that Atlas Bulk commenced the Commercial Court proceedings without its Danish trustees first seeking recognition. But the company was able to act in its own right in that regard to assert its undoubted claim. It is only when Navios pleaded and sought to rely on legal set-offs outside the normal bankruptcy set-off that the Danish officeholders needed to rely on the stricter rules applicable in an insolvency. I accept that having pleaded the non-mutual set off argument and before recognition proceedings commenced Navios then bought in an additional debt so that it could also run the post-insolvency assignment argument: but there is no sense in which the Danish officeholders encouraged or permitted that course to be taken. It is simply the case that Navios took an informed judgment that such a commercial move might work which has in the event proved to be wrong.
- In view of the conclusion I have reached it is unnecessary to address the position at common law. But my reading of the CBIR is at least consistent with the trend of evolving law.
- Since the decision in Galbraith v Grimshaw [1910] AC 508 at 510 there has been a problem of some cross border insolvency cases "falling between two stools". In that case a Scottish Trustee in bankruptcy sought to rely in England on provisions of Scottish insolvency law which retrospectively avoided attachments over property within the estate. The House of Lords held that Scottish insolvency law had no effect in England (where the attachment had taken place) whilst the identical provisions of English insolvency law applied only to English bankruptcies (and were therefore of no avail to the Scottish Trustee). The result was not without its critics. One was Professor Fletcher ("The Law of Insolvency" 3rd ed. page 773 (now 4th ed. 993)) who described the outcome as a:-
"Somewhat unsophisticated, if not disingenuous, decision which purports to disallow any possibility that the rules of law in force in one jurisdiction may enjoy effect elsewhere by virtue of rules of private international law in force in the other countries concerned".
This criticism was noted by Lord Walker of Gestingthorpe in Al-Sabah v Grupo Torras [2005] UKPC 1 at paragraph 41.
- The criticism led to a modification of the rule by the Privy Council in Cambridge Gas Transportation Corporation v Navigator Holdings [2006] UKPC 26 where at paragraph [22] Lord Hoffman expressed the view that:-
"At common law, their Lordships think it doubtful whether assistance could take the form of applying provisions of the foreign insolvency law which form no part of the domestic system. But the domestic court must at least be able to provide assistance by doing whatever it could have done in the case of a domestic insolvency. The purpose of recognition is to enable the foreign office holder or the creditors to avoid having to start parallel insolvency proceedings and to give them the remedies to which they would have been entitled if the equivalent proceedings had taken place in the domestic forum".
- This approach has now been endorsed by the Court of Appeal in Rubin v Eurofinance [2010] EWCA Civ 895 at paragraph 62 where Ward LJ (delivering the unanimous judgment of the court) stated:
"I accept the general principle of private international law that bankruptcy, whether personal or corporate, should be unitary and universal. There should be a unitary bankruptcy proceeding in the court of the bankrupt's domicile which receives world wide recognition and it should apply universally to all the bankrupt's assets. That is the law stated in Cambridge Gas and HIH Insurance [2008] UKHL 21 and I would follow it. Add to that the further principle that recognition carries with it the active assistance of the court which should include assistance by doing whatever this court could have done in the case of domestic insolvency…applying the common law I would therefore allow the appeal".
This conclusion he frankly acknowledged was "a novel, though we believe inevitable and desirable, development of the common law".
- I do not base my conclusion upon the common law: but I regard my construction of Article 21(1)(g) as consistent with that development of the common law. Although I am not treating the Danish insolvency as unitary and universal, I am making available to the Danish officeholders the remedies that would be available to an English liquidator if the equivalent proceedings had taken place in the domestic forum.
- I will accordingly make the declaration sought.
- I will hand down this judgment at 10:30am on 13 April 2011. I do not expect the attendance of legal representatives. I will on that occasion adjourn the question of costs and any other applications to a date later this term to be fixed through the usual channels.
Mr Justice Norris
13 April 2011
