In a significant judgment on 9 November 2017, the High Court in London granted recognition of the extraordinary administration proceedings on-going in respect of the Croatian conglomerate Agrokor as a foreign proceeding under the UK’s Cross-Border Insolvency Regulations¹.  

The judgment confirmed that a wide range of foreign proceedings are recognisable by the English courts under The Cross-Border Insolvency Regulations 2006 (“CBIR”), reflecting the purpose of the UNCITRAL Model Law (which the CBIR implements in the UK) to facilitate co-operation between courts in relation to cross-border insolvency proceedings.  

The hearing was a rare example of an application for recognition under the CBIR being contested, with the Russian lender Sberbank claiming that the Croatian proceedings did not amount to a “foreign proceeding” under the CBIR, and that they were “manifestly contrary” to English public policy.

Background

Agrokor d.d. is the largest privately owned company in Croatia, accounting for around 15% of Croatia’s GDP.  It specialises in agriculture, food production and related activities, with sales revenues of €6.465 billion and around 60,000 employees in 2015.

Agrokor’s operating performance and finances deteriorated in 2016.  In light of Agrokor’s size and its importance to the country’s economy, the Croatian parliament passed The Law for the Extraordinary Administration for Companies with Systemic Importance for the Republic of Croatia (commonly known as “Lex Agrokor”). On 10 April 2017 an order was made to place Agrokor and 50 of its affiliates into an extraordinary administration process under Lex Agrokor ("EA"), which included a moratorium on enforcement proceedings against the group. 

Although the recast EU regulation on insolvency proceedings (Regulation 2015/848) currently applies to Croatia, EA is not listed in its Annex A as a “main proceeding” that would benefit from automatic recognition in other EU Member States.  Accordingly, in July 2017, Agrokor applied for the EA to be recognised in England under the CBIR.  

Model Law and CBIR

The Model Law on cross-border insolvency as adopted by the United Nations Commission on International Trade Law on 30 May 1997 (the “Model Law”) provides a framework for the recognition of foreign insolvency proceedings and, if recognised, the courts should then provide certain assistance to the foreign office holder including, in certain instances, a stay on any enforcement or other legal proceedings against the foreign company’s assets.  The Model Law has been adopted in the UK by virtue of the CBIR.

For the purposes of the CBIR, a foreign proceeding constitutes "a collective judicial or administrative proceeding in a foreign State… 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".

Challenges

Sberbank challenged the recognition application on a number of grounds summarised below.

1.Sberbank claimed that the EA was not a “foreign proceeding” under the CBIR on the following grounds:

- There is no scope to recognise group proceedings under the CBIR. The Court dismissed this argument on the basis that neither the Model Law nor the CBIR prevent recognition of a group proceeding in relation to a single debt and to not recognise group proceedings would leave a significant gap in the ability to obtain international recognition where applicable.

- Lex Agrokor is not “a law relating to insolvency” as required by the CBIR. The Court dismissed this, ruling that for a law to relate to insolvency, insolvency need only be one of the grounds on which proceedings could be commenced, and it did not change the position if certain affiliates subject to the EA were in fact solvent.

- The EA is not a “collective proceeding” as required by the CBIR. While Sberbank agreed that the EA related to all the assets and liabilities of Agrokor per the Model Law, it argued that the term “collective” only relates to the debtor and its own creditors, not the debtor and creditors of other companies within the group.  Matthews J disagreed, finding that a global settlement of all of the debtors subject to the EA and all of their creditors did not mean that the EA was not a collective proceeding.

- The EA is not a proceeding “for the purpose of reorganisation or liquidation” as required by the CBIR. Matthews J did not accept Sberbank’s argument because, although it was not the only possible outcome, a reorganisation or liquidation of Agrokor was one of the outcomes expressly contemplated by Lex Agrokor.

- The EA is not “subject to control or supervision” by the Croatian court as required by the CBIR. Matthews J held that the EA was under the supervision of the Croatian courts through the extraordinary administrator appointed by the Croatian court, even if the Croatian government could also exercise certain powers in relation to the EA pursuant to Lex Agrokor.

2. Sberbank argued that Recognition of Lex Agrokor in the UK would be manifestly contrary to public policy.

Sberbank claimed, in particular, that the English law requirement for an insolvency proceeding to accord creditors parri passu treatment was infringed.  Matthews J rejected Sberbank’s argument, finding there to be no violation, “let alone a manifest violation”, of English public policy.  He concluded that the "fact that the priorities of the Croatian law in reorganising or liquidating the company are different from those which apply or would apply under English law, is simply not enough".

Accordingly, the English High Court approved the office holder’s application for recognition of the EA as a foreign main proceeding within the CBIR.

Appeal

At a subsequent hearing on 18 December 2017, Matthews J denied Sberbank permission to appeal his decision and stated that Sberbank must apply directly to the Court of Appeal for permission to appeal. Assuming this is given, we would expect Sberbank’s appeal to be heard in the coming months.