Corporate insolvency – conflicts of laws – jurisdiction – stay of proceedings UNICTRAL Model Law – arbitration – abuse of process – disclosure

The applicants and the respondent, Ogx, a Brazilian company, entered into a charter agreement. Ogx got into financial difficulties and the Brazilian court approved a reorganisation plan. Because there were ongoing negotiations to modify the charter agreement, it was excluded from the plan. Subsequently a new charter was agreed which was outside the Plan and stipulated a LCIA arbitration.

Ogx made a without notice application to the Chancery Division for recognition of the plan as a foreign insolvency proceeding under the Model Law. Its motive was to take advantage of the automatic stay of proceedings consequent on recognition (Model Law, Article 20) to stay the arbitration which the applicants had commenced in London. The company did not tell the court that the new charter was outside the Plan.

The applicants applied to set aside the recognition and stay on the ground of material non-disclosure. The court accepted that normally recognition of a foreign insolvency proceeding would follow if the requirements of Articles 15 and 17 were met and that the Article 6 public policy exception should be construed restrictively.
However the judge considered that the court retained a residual discretion to refuse recognition if it was being sought for an improper purpose. Although Article 20 provided for an automatic stay of proceedings, that stay had the same effect and object as section 130(2) of the Insolvency Act 1986, namely to secure pari passu distribution of assets among unsecured creditors and therefore it could not operate against a creditor who was outside the collective winding-up and distribution process. In such a case the court would terminate or modify the stay under Article 20(6).

Ogx had applied for recognition only to get a stay to which it was not entitled and had not complied with its duty of full and frank disclosure. Had the set-aside application not been compromised, the court would have been justified in refusing recognition, modifying the stay to allow the arbitration to proceed and awarding indemnity costs against the company.

The court will prevent the recognition and stay process from being abused. The duty of disclosure must be observed when preparing and making a without notice application in insolvency proceedings.