Personal Guarantee effect of insolvency proceedings overseas

Do overseas insolvency proceedings provide a defence to a claim under a personal guarantee and indemnity given subject to English law? Can a jurisdictional challenge be made successfully to avoid English proceedings under a guarantee and indemnity agreement?

Background Facts 

The Claimants applied for summary judgment in respect of claims under three Guarantee and Indemnity Agreements given by Mr Singal, a resident in India, in respect of sums advanced by the Claimants under three loan agreements entered into with an Indian company called Bhushan Power & Steel Limited (“BPSL”).  Mr Singal was the Chairman and Managing Director of BPSL.

The loans were intended for BPSL to acquire machinery and equipment for a construction project at a BPSL facility in Orissa, India. The loan agreements were governed by German law. 

The Claimants were German, state-owned financial institutions specialising in export credit lending. KfW was established in 1948 under the Marshall Plan, KfW IPEX is a subsidiary of KfW and the group comprises one of Germany’s largest financial institutions (“KfW”).

BPSL entered into an insolvency process in India under the Indian Insolvency and Bankruptcy Code 2016 known as a Resolution Process. That was an event of default under the loan agreements.

The claims against Mr Singal under the guarantees were for USD and EUR sums equivalent to around £150m arising from BPSL’s default under the loans. Although described as guarantees, the agreements which Mr Singal entered into were expressed as obligations to guarantee the liabilities of BPSL and to indemnify KfW as primary obligor.

The Issues

The issues were two-fold: 

1. the effect of the Indian proceedings and 
2. a challenge to the jurisdiction of the English courts.

Mr Singal denied liability on the basis of the Indian insolvency process to which BPSL was subject and in which KfW were creditors of BPSL, and on the basis of provisions of Indian insolvency law, s238 of the Indian Insolvency and Bankruptcy Code 2016. Mr Singal also disputed that the English court had jurisdiction. After raising these as issues, Mr Singal took no active role in the proceedings.

In response to these arguments, KfW contended that the insolvency of BPSL could neither provide Mr Singal with a defence nor discharge his obligations because in law, a creditor may pursue its debtor and its surety at the same time or in any order it chooses: Andrews & Millett : para 13-002. The claims were not claims against BPSL itself and BPSL was not a party to the proceedings. Also, by Clause 6 of the guarantees, Mr Singal waived any objection to KfW taking action against him first. If there had been recoveries by KfW from BPSL in the insolvency proceedings, KfW would have had to say so and given credit. But there had been no recoveries.

In relation to jurisdiction, KfW relied on the fact that the guarantees were not only stated to be subject to the exclusive jurisdiction of the Courts of England and English law would apply, but also that Mr Singal had also agreed in the terms of the guarantee to an express waiver of any right to contest English law jurisdiction.

Implications

If you receive proceedings and wish to challenge jurisdiction, there is a methodology and strict time limits for doing so. It must be done straightaway, before taking a step in the action otherwise, you risk waiving your right to challenge, even if you have a valid jurisdictional point.

It is commonplace to specify which jurisdiction and choice of law will apply to any disputes. In this case, it was also helpful for the beneficiary of the guarantee that the guarantor/indemnitor had waived any right to object to or challenge the jurisdiction. Consider whether your standard clause includes this provision.

If your standard document imposes separate and distinct obligations on personal guarantors and/or indemnitors then this case provides a useful summary of when each obligation arises and whether a demand is a pre-requisite.