English court recognises Croatian insolvency proceeding, outlines factors to consider

Out-Law Legal Update | 14 Dec 2017 | 10:29 am | 3 min. read

LEGAL UPDATE: A ruling by the High Court in England on a Croatian extraordinary administration proceeding highlights the wide range of foreign proceedings which will be recognised by the English courts and also serves to illustrate that recognition is not always desirable from the perspective of certain creditors. The Court decided that a Croatian extraordinary administration proceeding qualifies as a "foreign proceeding" under the under the Cross Border Insolvency Regulations (CBIR). This is the first time in an English court that a recognition application has been contested by a third party, although the third party was unsuccessful.

The ruling means that the Croatian administration has been recognised under English law and, therefore, a stay on any enforcement or other legal action against the company's assets in England has been put in place. The decision was made despite opposition from a creditor bank which had started arbitration proceedings against the company in London.

Agrokor is the largest private company in Croatia, with revenue of €6.5 billion equal to roughly 10% of Croatia's GDP.

On 6 April 2017 the Croatian parliament passed a new law designed to help the restructuring of companies so large that they had systematic importance to the wider country. On 10 April, Agrokor and its group were placed into extraordinary administration under the new law.

Sberbank, a Russian bank and Agrokor's largest creditor, began arbitration proceedings against Agrokor in London.

The CBIR gives force to the UNCITRAL 'model law' in Great Britain. The model law creates a framework for the recognition of insolvency procedures between countries. The CBIR states that an overseas insolvency process will be recognised if it meets the definition of "foreign proceeding" set out in the CBIR.

The CBIR says: "'foreign proceeding' means a collective judicial or administrative proceeding in a foreign state, including an interim proceeding, pursuant to a law relating to insolvency in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganisation or liquidation".

Recognition gives the company in question protection equivalent to that given when a winding-up order is made, including an automatic stay on any enforcement or other legal process over the company's assets in England. For Agrokor, this would mean staying the Sberbank arbitration proceedings.

Agrokor applied for recognition in England under CBIR and Sberbank contested the application.

Sberbank's arguments were that a Croatian extraordinary administration was not a "foreign proceeding" because:

  • it was not a proceeding "pursuant to a law relating to insolvency", because under Croatia's new law there was no need to show the wider Agrokor group companies were insolvent;
  • its purpose was not "reorganisation or liquidation" because the only aim of the process was to protect important companies, at the expense of their creditors, and protecting creditors was a key principle of a reorganisation;
  • it was not "collective" because it didn’t relate to the individual debtor and its creditors, but to the debtor and its wider group and their creditors;
  • it was not "subject to control or supervision by a foreign court" because the process was mainly controlled by the Croatian government and not the Croatian courts; and
  • the extraordinary administration is group proceeding in respect of both the Agrokor holding company and all its group entities, whereas the application for recognition only relates to one individual company.

Sberbank also argued that it would be "manifestly contrary" to English public policy to recognise the extraordinary administration because it would be fundamentally unfair to do so as it would deny creditors access to any effective legal remedy for recovering their debts.

The court dismissed Sberbank's arguments:

  • a proceeding could be "pursuant to a law relating to insolvency" where insolvency was just one of the grounds on which the proceeding could be commenced. It didn't matter if insolvency wasn't the only possible trigger;
  • the extraordinary administration proceeding did not have the sole purpose of protecting companies at the expense of creditors. Its main purpose was to restructure systematically important companies, and if a restructuring wasn't possible the process could be flipped into a wind-down;
  • it was a "collective proceeding" because all creditor groups were subject to it. The fact that group companies could be involved in the proceeding didn’t make it any less collective;
  • the proceeding was under the control and supervision of the Croatian court, as it had authority to make certain orders in the proceeding, as well a supervisory role. The control or supervision required for the CBIR could be "potential rather than actual" and could be" indirect rather than direct". It also did not matter if another body, such as the Croatian government, also had influence over the proceeding; and
  • there is nothing in the CBIR to prevent recognition of a proceeding as it relates to a particular individual debtor, even if the proceeding was initiated in respect of a wider group.

The court also dismissed Sberbank's public policy argument. Just because the priorities of the new Croatian law in reorganising or liquidating a company were different from those under English law it did not make recognition against public policy.

Simon Gibbs is a restructuring expert at Pinsent Masons, the law firm behind Out-Law.com