Leave has been given by the English High Court for a claimant to continue proceedings against STX, a Korean ship building company despite its entry into bankruptcy protection under Korean insolvency law. The proceedings were well advanced and raised complex issues where English law was not clear – as to the legality of ‘side agreements’ to a shipbuilding contract.
Dalian, a subsidiary of STX, a Korean shipbuilding company, entered into shipbuilding contracts with Liberian companies (buyers) to deliver five vessels over a period, with payments by instalments. There was a separate side agreement which had the effect of reducing the price by $6 million for each vessel. The contracts were governed by English law.
As a result of “turmoil in the global shipbuilding market”, Dalian entered into a Chinese insolvency process, before the steel had been cut for any of the hulls, and before the buyers had paid any instalments.
Under the Enterprise Bankruptcy Law of China, the Chinese administrator gave notice that each contract was “deemed to be rescinded”, which the buyers said under English law gave them a claim for US$90m in damages.
On the Chinese administrator rejected those claims in Dalian’s bankruptcy, the buyers claimed on a guarantee given by STX and commenced proceedings in the English Commercial Court which STX defended.
STX then itself entered rehabilitation proceedings under the Korean Debtor Rehabilitation and Bankruptcy Act, approved by the creditors and by the Korean Court. The plan involved payment of 7.25% of admitted claims and for treatment of the balance of 92.5% as a “debt-for-equity” swap.
The Korean administrator obtained recognition from the English High Court of those rehabilitation proceedings as a foreign main proceeding under the Cross Border Insolvency Regulations 2006 in accordance with the provisions of the UNCITRAL Model Law. Consequently, a stay was imposed on all proceedings against STX.
The buyers applied to the High Court for leave to continue with their claims in the Commercial Court, despite the stay.
In granting leave, the English High Court said that the sole object of the continuation of the proceedings was to obtain an adjudication of the claim, verified and quantified by the English Commercial Court, which it would be up to the Korean Rehabilitation Court to adopt or reject. Any judgment obtained could not be enforced against STX and the conversion of the claim into a judgment could not alter the priorities in the Korean insolvency.
What was a complex and uncertain issue under English law – the effect of illegal side agreements – should not be visited upon the Korean Court. Resolution of a genuinely difficult issue of foreign law would assist rather than impede the insolvency process.
Also, the proceedings before the Commercial Court were reasonably well advanced. The parties had already expended considerable sums in preparation for the trial.
Finally, this would not lead to a “clamour” for other creditors to also seek similar leave. If any other creditors were likely to be met with an illegality defence, then a ruling by the Commercial Court would be of advantage in those cases also.
See Ronelp Marine Ltd & Ors v STX Offshore & Shipbuilding Co Ltd & Anor  EWHC 2228 (Ch).
The considerations taken into account are similar to those that apply in any application for leave to continue proceedings against a company in liquidation or administration, or against a bankrupt, absent any cross-border issues. In such cases, courts have given leave to proceed where the claim is complex, thus saving the insolvency appointee the time and cost of its determination through the proof of debt process, which may then be appealed; and where the claim is well advanced for trial.
Also, the Korean administrator was aware of the criticisms made by the High Court in the earlier decision of Re OGX Petroleo  EWHC 25, where separate arbitration proceedings wrongly stayed by the moratorium imposed by the recognition order were not initially disclosed to the court. These Commercial Court proceedings were clearly an issue raised by the Korean administrator at his application for recognition.