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?
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 were two-fold:
- the effect of the Indian proceedings and
- 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.
The court decided that Mr Singal was out of time for challenging jurisdiction. However, even if he had been in time, such challenge could not have succeeded, because each of the guarantees contained a valid and binding exclusive English jurisdiction agreement and additionally, the Defendant had agreed not to argue to the contrary as follows:
“The English courts have exclusive jurisdiction to settle any dispute in connection with this Guarantee and Indemnity (a Dispute)”; and
“The English courts are the most appropriate and convenient courts to settle Disputes. [The Defendant] agrees not to argue to the contrary and waives objection to those courts on the grounds of inconvenient forum or otherwise in relation to proceedings in connection herewith”.
Furthermore, those clauses constituted a jurisdiction agreement within the scope of Article 25 of the Brussels Regulation Recast which precludes the possibility of a challenge to the jurisdiction on forum non conveniens or other common law grounds. As Popplewell J said, “Where article 25 applies, the court is left with no discretion to exercise on forum non conveniens or other grounds; it must give effect to the relevant agreement.”
Indian Insolvency Proceedings:
The court carried out a careful analysis of the guarantee and indemnity obligations and when they arose, considered whether they were dependent on a demand or not. The court recognised the range of obligations, including hybrids:
“Each case depends upon the actual words used. The Court approaches the task of characterisation without any preconceptions as to what the instrument creates;
“It is not necessary to shoe-horn a surety contract into the category of either pure guarantee or pure indemnity if it is in truth a mixture of primary and secondary elements - “Whether a particular contract of suretyship is of the one kind or the other or indeed a combination of the two turns on its true construction”
“The spectrum of contractual possibilities has pure guarantees at one end and performance bonds (a particularly strict form of indemnity contract) at the other. The space in between is occupied by modified guarantees, hybrid contracts (i.e. those which are a combination of guarantee and indemnity obligations) and pure contracts of indemnity (albeit short of performance bonds)”.
In this case, the Court decided that there was a breach for the purposes of Mr Singal’s guarantee when BPSL failed to pay sums due. The judge accepted the submission that no action taken against BPSL could affect KfW’s rights against Mr Singal, in view of the language of the guarantees.
Furthermore, English-law obligations under the Guarantees could only be altered or discharged by operation of English law. And it is well-established (aside from the EU Insolvency Regulation, which has no application to this case) that English law will not give effect to a foreign insolvency law that purports to alter or discharge English law obligations.
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.
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