Lisa Bo Larsen and Michael Ziegler (Foreign Representatives of Atlas Bulk Shipping A/S) and Another v Navios International Inc.
| Jurisdiction | England & Wales |
| Judge | Mr Justice Norris:,Mr Justice Norris |
| Judgment Date | 13 April 2011 |
| Neutral Citation | [2011] EWHC 878 (Ch) |
| Docket Number | Case No: 8471 of 2010 |
| Court | Chancery Division |
| Date | 13 April 2011 |
[2011] EWHC 878 (Ch)
Mr Justice Norris
Case No: 8471 of 2010
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
Robin Dicker QC & Stephen Robins (instructed by Barlow Lyde & Gilbert LLP) for the Applicants
Stephen Cogley (instructed by Reed Smith LLP) for the Respondent
Hearing date: 12 January 2011
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...
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