Arbitration and foreign bankruptcy proceedings: the English court’s pro-arbitration stance 

England and Wales

The English courts are known for being pro-arbitration. In the recent case of Riverrock Securities Limited v International Bank of St Petersburg (Joint Stock Company) [2020] EWHC 2483 (Comm) the English High Court has granted an anti-suit injunction in relation to claims being made in foreign bankruptcy proceedings, where the underlying agreements included arbitration provisions with a London seat.

The parties

The International Bank of St Petersburg (IBSP) was a large retail bank incorporated in Russia. IBSP was placed into provisional administration by the Central Bank of Russia in October 2018 and bankruptcy proceedings were commenced in respect of IBSP before the St Petersburg Court in November 2018. IBSP was declared insolvent in September 2019 and the Russian State Corporation Deposit Insurance Agency (DIA) was appointed as its official receiver in bankruptcy.

Riverrock Securities Limited (RSL), is an English company regulated by the FCA.

The contracts

Between January to July 2018 RSL and IBSP entered into nine substantially similar contracts for the sale by RSL to IBSP of credit linked notes of approximately US$15m each. All of the contracts were governed by English law and provided for resolution of disputes by London seated arbitration under the LCIA Rules (the Contracts).

St Petersburg Action

In October 2019, in the context of bankruptcy proceedings, IBSP commenced proceedings in the arbitrazh court in the city of St Petersburg seeking the invalidation of the Contracts and repayment of the sums paid to RSL on the basis that the transactions were a scheme intended to siphon off IBSP’s assets (the St Petersburg Action). In doing so IBSP was relying, in particular, on certain provisions of the Bankruptcy Law of the Russian Federation and the Civil Code of the Russian Federation.

RSL’s application for an anti-suit injunction

RSL applied to the English court under s.37 of the Senior Courts Act 1981 for an anti-suit injunction in respect of the St Petersburg Action.

The legal threshold to determine the anti-suit application was summarised by the court as follows:

  1. The English court has power under s. 37 to grant an anti-suit injunction in relation to proceedings brought in breach of an arbitration agreement even if no arbitral proceedings have been commenced or are in prospect.
  2. The applicant must demonstrate that there is a high probability of success that the foreign proceedings are in breach of an arbitration agreement (the Breach Issue).
  3. If 2 above is satisfied, it is then for the respondent to show a strong reason why the anti-suit injunction should not be granted (i.e. are there justifications for proceedings in the foreign court) (the Strong Reason).
  4. Finally, it is in the court’s discretion to grant the anti-suit injunction and in exercising that discretion the court will have regard to whether it is just and convenient to grant the injunction (the Discretion).

Taking each of the above in turn:

On the Breach Issue, IBSP’s submitted that RSL could not get over that threshold because:

  1. The St Petersburg Action was being pursued by DIA not IBSP.
  2. The arbitration agreement in the Contracts does not cover the claims brought in the St Petersburg Action. In doing so, IBSP adopted the reasoning of the Singapore Court of Appeal in Larsen Oil and Gas Pte Ltd v Petroprod Ltd, to the effect that arbitration clauses should not ordinarily be construed to cover avoidance claims in insolvency in the absence of express language.
  3. The claims in the St Petersburg Action werenot arbitrable because they were insolvency claims.

The English court dismissed each of the above on the following basis:

  1. The court was satisfied that RSL had established a strong case that the claims being pursued in the St Petersburg Action were IBSP’s claims which DIA was bringing on IBSP’s behalf. In doing so the court analysed the language of the bankruptcy law pursuant to which the claims were being brought in the St Petersburg Action and looked at the document which commenced the St Petersburg Action (this document identified the applicant as “[IBSP] represented by the Official Receiver State Corporation Deposit Insurance Agency”.
  2. The arbitration agreement in the Contract was expressed in wide terms because it referred to arbitration claims “under or…in connection with”. The analysis in Larsen, particularly the presumption that an arbitration agreement does not extend to claims which only arise in a company’s insolvency, is not part of English law. The court reiterated the “generous approach” to construction of arbitration agreements advocated in Fiona Trust & Holding Corporation v Privalov [2007] UKHL 40.
  3. Even though the relief sought under the Bankruptcy Law of the Russian Federation in the St Petersburg Action was to be regarded as insolvency relief, it did not follow that the claims were non-arbitrable of a matter of English law (being the law of the seat and the arbitration agreement). In circumstances where the arbitral tribunal was able to grant the relief sought, those claims were arbitrable. This is consistent with the previous decision of the English Court of Appeal in Fulham Football Club (1987) Ltd v Richards [2011] EWCA Civ 855 and the more recent decision in Bridgehouse (Bradford No 2) Ltd v BAE systems plc [2020] EWCA Civ 759.

The key Strong Reasons relied on by IBSP (which were all dismissed by the English court) were:

  1. IBSP submitted that the anti-suit injunction would effectively prevent an officer of a foreign court (i.e. the DIA) from carrying out its duties to the foreign court and IBSP’s creditors. This was dismissed on the basis that the anti-suit injunction was directed at IBSP as the counterparty to the Contracts and did not interfere with DIA’s duties.
  2. The policy of the English court to support foreign insolvency proceedings provides a strong reason to refuse an anti-suit injunction. In this regard, the English court held that there was no countervailing public policy that overrides the “clear policy of English law of upholding arbitration agreements”.
  3. The risk of inconsistent decisions arising from the fact that the DIA would be forced to pursue IBSP’s claims on the Contracts in LCIA arbitrations whereas creditors of IBSP or other third parties could continue to bring proceedings in relation to the Contracts in Russia was part of IBSP’s bankruptcy proceedings. The English court recognised that if granting an anti-suit injunction created a risk of inconsistent decisions that is a factor that can be a Strong Reason against granting of an anti-suit injunction. However, in the present case, the court was not satisfied there was a risk of inconsistent decisions.

On the Discretion Issue there were two issues that were addressed by the court:

  1. It was submitted that it was “highly probable” the anti-suit injunction would not be obeyed. Rather than comment on the probability of compliance, the court dealt with this by relying on prior authority that it is only in rare circumstances where difficulties with enforcement of an English injunction would be a reason to refuse to grant it. The court also recognised that enforcement of any judgment obtained in breach of the injunction could also be affected.
  2. It was further submitted that IBSP may be prejudiced if the English court later decided that no final anti-suit injunction was appropriate. The court was not convinced by this submission on the basis that RSL had offered an undertaking in damages and any delay in recovery by IBSP was capable of being compensated by an award of interest.

Jurisdiction challenge

In defending the anti-suit application, IBSP made an application under Part 11 of the English Civil Procedure Rules challenging the jurisdiction of the English court on the basis that Russia was the natural and appropriate forum. IBSP’s position was that RSL should apply for a stay in the St Petersburg court. IBSP submitted that the St Petersburg court was better placed to understand the nature of the claims and determine whether they fell within the LCIA arbitration agreement.

The English court dismissed this challenge as “hopeless”. In circumstances, where the arbitration agreement provided for a London seat, arguments that the English court is not the appropriate forum to grant anti-suit relief are extremely challenging. This is also supported by the recent English Supreme Court judgment, our analysis of which is available here.

On the interaction between an anti-suit injunction and seeking a stay in the foreign proceedings, the court expressed the view that:

  • a party applying for an anti-suit injunction was not obliged to seek a stay in the foreign proceedings; and
  • a failed attempt to obtain a stay in the foreign proceedings does not of itself preclude an application to the English court of an anti-suit injunction.

Conclusion

In another recent decision in Telnic Ltd v Knipp Medien und Kommunikation GmbH [2020] EWHC 2075 (Ch), Sir Geoffrey Vos sitting in the English High Court ruled that where a debt is governed by an arbitration agreement, it is appropriate for the court to stay or dismiss a winding up petition without investigating whether the debt is disputed in good faith and on substantial grounds. Our analysis of that case is available here.

This is the latest in a series of decisions from the English court which support the use of arbitration in several circumstances arising in the company law area, such as insolvency claims, foreign bankruptcy proceedings and claims under the Companies Act 2006.