In the recent case of Re Prosafe SE; Chang Chin Fen v Cosco Shipping (Qidong) Offshore Ltd [2021] CSOH 94 (Re Prosafe), the Scottish Court of Session has dismissed an application by Norwegian ship-operator Prosafe for the Court to stay enforcement of English law governed claims in support of Prosafe’s Singapore moratorium process.
The application was made under the Cross-Border Insolvency Regulations 2006 (UK) (the CBIR) which implements the UNCITRAL Model Law on Cross-Border Insolvency in the United Kingdom (the Model Law).
Whilst willing to recognise the Singapore procedures, the Scottish Court would not grant the requested relief under the Model Law in respect of claims governed by English law that “stand outside” of the foreign proceedings.
Re Prosafe is notable as the Scottish court declined to grant temporary stay orders while the restructuring process was under way on the basis of the rule in Gibbs (as opposed to refusing to recognise the actual discharge of the debt or a permanent stay on enforcement of that debt). This could give rise to possible challenges in future cross-border restructurings.
The Singapore restructuring and Moratorium Orders
Prosafe SE (PSE) and its subsidiary Prosafe Rigs Pte Ltd (PRPL, together with PSE, the Prosafe Companies), sought and were granted moratorium orders by the Singapore High Court on 27 May 2021, pursuant to section 64 of the Insolvency, Restructuring and Dissolution Act 2018 (Singapore) (IRDA) (the Moratorium Orders).
Section 64 of IRDA allows a company to apply for a ‘debtor-in-possession’ moratorium where it proposes, or intends to propose, a creditors’ scheme of arrangement pursuant to section 210(1) of the Companies Act 1967 (Singapore) (the Companies Act).
In this case the Moratorium Orders were broadly framed preventing, among other things legal proceedings and security enforcement in respect of the Prosafe Companies. The orders were expressed to apply to the act of any person in Singapore, or within the jurisdiction of the Singapore Court, whether the act took place in Singapore or elsewhere.
The Prosafe Companies had been pursuing a restructuring of their debts, in respect of which they had reached ‘broad in-principle agreement on a detailed term sheet’ from 93.9% of their financial creditors. However they were concerned that two creditors – Westcon Yard AS (Westcon) and Cosco (Qidong) Offshore Co Ltd (Cosco) did not support the restructuring and would take steps to enforce their claims.
The Moratorium Orders were sought to ensure that these dissenting creditors would not take enforcement steps or other disruptive activity while the restructuring was being implemented by way of the creditors’ schemes of arrangement (the Schemes).
The Cosco claim
Cosco was owed deferred consideration by PRPL under a promissory note governed by English law. PSE had guaranteed this amount under an English law guarantee, and the claim was also secured by a second ranking mortgage over semi-submersible accommodation rigs located off the coast of Brazil (that had been built by Cosco).
However, Cosco’s rights to payment were subordinated to the senior mortgagee pursuant to an English law deed of coordination, which required the consent of the senior mortgagee for Cosco to take any step to exercise or enforce any right or remedy in respect of the promissory note. Cosco commenced litigation against the senior mortgagee seeking its consent to allow Cosco to seek payment from the Prosafe Companies.
Prosafe sought and obtained recognition of the Moratorium Orders in Brazil, and relief in the form of moratorium orders in Brazil, pursuant to the Brazilian legislation adopting the Model Law.
The Scottish recognition applications
However, the Prosafe Companies were concerned that two of their oil rigs in the North Sea may be required to enter Scottish waters, and that Cosco might seek to enforce its claim against those rigs should that occur.
Accordingly, the Prosafe Companies applied to the Scottish Court under the CBIR, seeking orders:
- recognising the Moratorium Orders as a ‘foreign non-main proceeding’ in respect of PSE and a ‘foreign main proceeding’ in respect of PRPL; and
- granting relief which would (among other things) prevent any legal proceedings against the Prosafe Companies or any enforcement of security against their assets. This was seeking a stay of the type that would have been applicable if there had been an administration (rather than a winding up) in Scotland, requiring discretionary orders to be made under Article 21 of the Model Law in respect of both Prosafe Companies (whilst PRPL would be entitled to automatic relief under Article 20 in respect of its foreign main proceeding, it needed to seek a modified form of order to reflect that it was undergoing a restructuring rather than liquidation process).
The application by the Prosafe Companies was atypical in that because the orders were sought in respect of two particular creditors, the Prosafe Companies requested the Scottish Court of Session not to make any recognition orders if the relief sought would not be effective against these parties. Both Cosco and Westcon were notified of the application, but only Cosco appeared at the hearing.
Recognition of the Moratorium Orders
Lord Ericht of the Scottish Court indicated that there were no particular difficulties with granting recognition orders in respect of the Moratorium Orders (as foreign non-main proceedings and foreign main proceedings, respectively), as the requirements under Article 17(1) of the Model Law were satisfied, and recognition would not be manifestly contrary to public policy.
The more challenging issue was whether the Scottish Court should grant the relief sought, particularly in light of the rule in Antony Gibbs & Sons v La Société Industrielle et Commerciale des Métaux (1890) LR 25 QBD 399 (Gibbs). Gibbs held that, as a matter of English law, a debt governed by English law cannot be discharged by a foreign insolvency proceedings (unless the creditor submits to those foreign proceedings).
The submissions
Prosafe argued that the Moratorium Orders were separate from the Schemes and simply provided temporary “breathing space” for the Prosafe Companies to discuss the restructuring with their creditors. The Schemes had not been sanctioned by the Singapore Court, and Prosafe was not seeking recognition of any intended creditors’ scheme under the application. Accordingly, there was no obligation on creditors to accept any proposals nor to reduce or discharge any of their debt. In this context, Prosafe argued that the rule in Gibbs was irrelevant.
Cosco argued that it was not subject to the jurisdiction of the Singapore Court, was not party to the Schemes and would not submit a proof of debt in respect of them. It argued that its debts stood outside the Singapore process, and it would not be appropriate for Cosco to be prevented from pursuing its ordinary remedies against the Prosafe Companies. Accordingly it considered that an order granted under Article 20 would not affect a creditor under an English law contract standing outside the process, and that an order under Article 21 was not necessary to protect the interests of the creditors that submitted to the Schemes and would prejudice Cosco. Further, Cosco argued that its claims were governed by English law, and that Singapore restructuring processes were not capable of modifying or extinguishing them (relying on Gibbs), and the object of the Moratorium Orders was to try to bind Cosco to the Schemes.
Were the Schemes relevant to the Moratorium Orders?
Whilst the Scottish Court accepted that the Singapore Moratorium Orders and the Schemes arose under two separate statutes and two separate court processes, it considered that treating the Schemes as irrelevant to the application for the stay orders in respect of the Moratorium Orders would be too formalistic.
The Court noted that the Singapore moratorium is not a free standing process, but is only available where a company proposes, or intends to propose, a scheme of arrangement. It was also clear that the purpose of the Moratorium Orders was to prevent Cosco and other dissenting creditors taking action to disrupt the restructuring before it could be implemented via the Schemes.
Accordingly, the Scottish Court considered the effect of the intended Schemes was relevant to consider when determining whether to grant the stay relief sought under Article 21 in respect of the Moratorium Orders.
The Cosco claims “stand outside” of the Singapore processes
Lord Ericht began his analysis by referring to the ruling in Nordic Trustee ASA v OGX [2016] EWHC 25 (Nordic Trustee) in which Snowden J stated that the Model Law is not intended to prevent claims that are not the subject of the collective proceedings:
“Such persons stand outside the collective process, and it would not be appropriate to utilise the stay under Article 20(1) [of the Model Law] to prevent them from pursuing their ordinary remedies against the company."
He then went on to consider the rule in Gibbs, noting that it also applies under Scots law, and characterised it as follows:
“A debt under a contract whose proper law is the law of another jurisdiction may, for the purposes of Scots law, be discharged by insolvency proceedings in that other jurisdiction, but such proceedings will not, for the purposes of Scots law, discharge a debt where the proper law of the contract is not the law of the jurisdiction in which the proceedings are taking place.”
He placed particular emphasis on the English Court of Appeal decision of OJSC International Bank of Azerbaijan [2018] EWCA Civ 2808 (OJSC) citing it as authority for the proposition that it would be “wrong in principle” to use the powers under Article 21 to grant a stay that would circumvent the English law rights of English creditors under the rule in Gibbs. He considered that the circumstances of the OJSC case were “broadly similar” to those applicable to the Prosafe Companies, except that the Prosafe Companies were bringing their petitions seeking stay orders before, rather than after, the end of the foreign restructuring.
In particular, he noted the point of principle from OJSC, that the Court should not exercise its power to grant a stay under Article 21, going beyond the automatic stay under Article 20, where to do so would in substance prevent the English creditors from enforcing their English law rights in accordance with the Gibbs rule.
The purpose of the Moratorium Orders in this case was, in the view of the Scottish Court, to provide a breathing space to bind Cosco and other dissenting creditors through the intended Singapore schemes.
As a result, the Court held:
“[A]s a matter of English law, Cosco will not be bound by the Schemes and the Schemes will not extinguish the liabilities of PRPL and [PSE] under the [promissory note and guarantee]. These liabilities do not, as far as English law is concerned, form part of the restructuring. Pursuing them will not, as far as English law is concerned, disrupt the implementation of the restructuring as they do not form part of that restructuring. Cosco is entitled to enforce its rights under English law, and is entitled to do so before or after implementation of the Scheme.”
Accordingly, it held that Cosco’s claims “stand outside” of the Singapore collective insolvency process, of which the Moratorium Orders were an integral part.
Lord Ericht considered this to be sufficient for him to refuse to grant the stay remedies sought by the Pro Safe Companies under the CBIR and the Model Law in respect of Cosco.
Discretion to grant relief under the Model Law
Notwithstanding this decision, the Court also went on to consider whether the requirements for granting the stay orders were satisfied under the CBIR.
In the case of PSE, such relief needed to be granted as discretionary relief under Article 21 (rather than the automatic relief under Article 20) because PSE was only able to be recognised as a foreign non-main proceeding (in respect of which Article 20 does not apply). PRPL was able to be recognised as a foreign main proceeding, but the relief sought went beyond that automatically available in the case of foreign main proceedings under Article 20, and therefore further discretionary orders would be required pursuant to Article 20(6) and Article 21.
To grant the stay orders sought, the Court therefore considered that in the case of both Prosafe Companies it would need to be satisfied that: (i) the remedy was appropriate (under Article 21(1)); (ii) the remedy was necessary to protect the assets of the Prosafe Companies or the interests of the creditors (under Article 21(1)); and (iii) the interests of the creditors and other interested persons, including the Prosafe Companies, were adequately protected (under Article 22(1)). With respect to PSE, the Court also needed to be satisfied that the remedy related to assets that, under Scots law, should be administered in the Singapore proceedings (under Article 21(3)).
Lord Ericht considered that none of these tests were met, essentially for the same reason in each case – that the Cosco claims stood outside the Singapore collective processes.
Position of other creditors
However, Lord Ericht stated that the position was different in respect of the other creditors.
Although Westcon did not respond to the petition, Lord Ericht was satisfied that the tests in relation to granting relief under the CBIR had been met for the other creditors of the Prosafe Companies (it was not apparent that any other creditors had claims governed by English (or Scots) law).
Therefore, the Court would have been willing to grant the relief orders in respect of those other creditors. However (somewhat curiously) the Prosafe Companies requested that in the circumstances where Cosco were to be excluded from the order, the petitions as a whole should be refused.
Significance of the ruling
The decision in Re Prosafe is significant. It reinforces the importance of the rule in Gibbs where a foreign representative seeks the assistance of the UK courts under the CBIR in granting a UK stay in support of a foreign moratorium that impacts English law claims.
The Re Prosafe Court indicated that it would look to the intention of the moratorium (and related CBIR application) rather than simply drawing a distinction between temporary and permanent stays. Lord Ericht stated in this regard that the purpose of the Singapore moratoria was to not "to provide a breathing space for discussion with creditors but was in my view to provide a breathing space to bind Cosco and other dissenting creditors through the mechanism of a scheme."
However, the Re Prosafe decision appears to go further than the OJSC decision. In OJSC the question was whether an indefinite stay should be granted, extending beyond the completion of the foreign restructuring process. Indeed, it appears in that case that an order was made by Barling J in the English High Court granting recognition and a “suitably modified version of the automatic stay under article 20” which had the effect of preventing enforcement by English law claimants under their loan facility and notes during the period of the foreign process.
In that regard both Hildyard J and the Court of Appeal appeared to draw a distinction between a temporary stay and a permanent stay, with Hildyard J noting in OJSC v Sberbank [2018] EWHC 59 (Ch):
“That is to be contrasted with the grant of temporary relief to a foreign representative, after recognition of a foreign proceeding, which is calculated not to modify or remove a substantive right but to suspend its exercise for a sufficient time to enable either a liquidation or a plan of reorganisation to be put in place: and see paragraphs [12] and [62] above. That may well in the circumstances be characterised and justifiable as a procedural intervention, as indeed the modified stay imposed by Barling J plainly was in the present case. But that is wholly different in its true character from a permanent stay or moratorium such as is proposed now.”
In contrast, the Court in Re Prosafe appeared to consider that the requested temporary stay would not be a justifiable procedural intervention, on the facts of that case at least.
Future courts and practitioners will need to consider the principles that should be drawn from these decisions. Also of potential debate is the extent to which the Re Prosafe decision is applicable in other jurisdictions that apply the rule in Gibbs (such as Australia, Hong Kong and many offshore jurisdictions).
The decision is of less relevance to recognition proceedings which do not depend on compromising debts protected by the rule in Gibbs, given the UK Court has previously been willing to recognise the Singaporean moratorium where the rule in Gibbs was not engaged (see H & CS Holdings Pte Ltd v Glencore International AG [2019] EWHC 1459 (Ch)).
Standing outside the foreign process
In Re Prosafe, Lord Ericht placed significant emphasis on the concept of the English law claims “standing outside” of the Singapore restructuring process.
Precisely what this means remains unclear. For example, is it suggested that a creditor with an English law claim (who had not participated in the foreign process) should not be affected even where the English court was obliged to grant automatic relief under Article 20(1) of the Model Law in respect of the foreign main proceeding?
Lord Ericht cited Nordic Trustee for the proposition that the Model Law is not intended to operate to prevent persons whose claims are not subject to that collective proceeding from being able to pursue claims against the company. However it is important to note that the relevant claims in Nordic Trustee were excluded from the collective proceeding under the terms of that foreign proceeding - they were “standing outside” the foreign proceeding as a result of the ambit of the foreign proceeding itself (a point recognised by Hildyard J in OJSC v Sberbank [2018] EWHC 792 (Ch)) rather than due to the rule in Gibbs.
The OJSC decision, which did address the relationship of the rule in Gibbs with the Model Law, did not use the terminology of the English law claim “standing outside” the foreign proceeding, but instead appeared to endorse the position that the Court should not exercise its power to grant a discretionary stay under Article 21 (beyond that available under Article 20) if to do so in substance would prevent the English creditors from enforcing their English law rights in accordance with Gibbs.
Should the rule in Gibbs prevent temporary stays under the Model Law?
Lord Ericht put emphasis on the link between the Moratorium Orders and the ultimate Schemes intended to discharge the debts, including the English law governed claims. This however is a common feature of formal restructuring processes – for example in Chapter 11 the automatic stay on creditor enforcement precedes any ultimate reorganisation of debts under a plan of reorganisation (indeed, as noted above, in the Hildyard J appeared to accept that OJSC’s temporary stay was of this type, and appropriate). This raises the question of whether the rule in Gibbs should operate to prevent the Court granting discretionary stay orders (and/or (modified) automatic stay orders) under the CBIR in all such circumstances where a restructuring of debts is contemplated or intended?
There is some merit in the argument that there is little point in the English Court granting a temporary stay of an English law claim where the purpose of the stay is merely to give the company time to undertake a foreign compromise of the English law claim that will not be effective under English law.
However, there is risk in judging this question too early. While a foreign compromise of the English claims may not be possible under English law, mechanisms exist to restructure English law liabilities as part of a non-UK restructuring process – including pursuing a parallel English law scheme of arrangement or restructuring plan.
Furthermore, in many cases the situation will not be clear cut, and breathing room itself may be of benefit (e.g. to preserve liquidity, prevent multiplicity of proceedings, avoid unnecessary costs or preserve access to critical assets of the business) even if it does not ultimately result in a compromise of the English law claim.
Arguably, therefore, it remains possible that on facts of other cases in the future it may be possible to obtain relief under the CBIR in the UK for a temporary stay of English law claims in support of a non-UK restructuring process. Clearly however any applicant will need to consider the Gibbs question carefully, and come armed with appropriate justifications for why a stay of such English law claims is appropriate.
Cross-border challenges
Re Prosafe creates additional challenges for the use of the Singapore moratorium process as a “debtor-in-possession” restructuring regime.
Creditors with claims under English law will need to consider whether they have, or should, submit to the Singaporean jurisdiction and participate in the Singapore restructuring process, or whether they should seek to pursue their claims before the UK Courts (and similar issues will arise in respect of creditors with claims under the laws of the jurisdictions where the rule in Gibbs applies). Whether this option is feasible will depend upon, among other things, whether the Singaporean company has assets in the UK (or other relevant jurisdiction), and whether the creditor considers itself subject to the jurisdiction of the Singapore courts.
The outcome in Re Prosafe also points towards further divergence in the practical operation of the Model Law, and the extent to which the same process will be given effect in different countries, a point underlined by the fact that the Brazilian court recognised the Singapore Moratorium Orders in the Prosafe case.
Prosafe’s Moratorium Orders were expressed to have in personam extraterritorial effect, and would apply to “any person in Singapore, or within the jurisdiction of the Court.” In this case Cosco had not submitted to the jurisdiction of the Singapore Courts. However, if Cosco had operations or some presence in Singapore, would the enforcement of security in Scottish waters be a breach of the Moratorium Orders, and if so what would the consequences be? This is not something that has been tested in Singapore yet and raises interesting issues of conflict of law.
However, an indication of the possible risks inherent in that approach can been seen from the Singapore Court’s comment in Re: Zetta Jet Pte Ltd and Others (Asia Aviation Holdings Pte Ltd, intervener) [2019] SGHC 53, where Aedit Abdullah J warned (in the context of a company breaching a Singapore Court order enjoining the company continuing steps in respect of its bankruptcy proceedings in the United States):
“Flouting a Singapore order will carry consequences. Those advising in restructuring and insolvency matters abroad would do well to take note of that. Those breaching orders issued by Singaporean courts may not need to come to Singapore and may feel that they can thumb their noses with safety from foreign shores. But should they ever need to look to assets or information in Singapore, they will have to answer for their conduct. In the present case, the consensual discharge resolved the issue for the Trustee. The same result may not arise in other cases.”
The risk of such conflicts is growing as jurisdictions and courts exercise a greater degree of extra-territorial jurisdiction. This highlights the growing importance of both debtors and creditors having a well-developed and coordinated international legal strategy when considering cross-border restructuring or enforcement.
