ENGLISH COURT PROVIDES GUIDANCE TO PARTIES CHALLENGING OR SEEKING ENFORCEMENT WHERE THE AWARD DEBTOR IS IN ADMINISTRATION

In BSG Resources Ltd v Vale SA and others [2019] EWHC 2456 (Comm), the English Commercial Court (the Court) considered five applications concerning an arbitration award dated 4 April 2019 (the Award) which had resulted in an order of the English court for BSGR to pay damages of US$1.247 billion to Vale (the Enforcement Order). BSGR's challenge of the award (the Challenge Application) under the Arbitration Act 1996 (the Act) is due to be heard in November 2019.

Moulder J's decision in this case provides helpful guidance to parties which are either challenging or seeking to enforce an English award, in circumstances where the unsuccessful party in the arbitration has gone into administration.

Background

As Moulder J noted, she did not need to consider the detailed background in order to determine the applications before her. In summary, however: BSGR and Vale were parties to a mining joint venture in Guinea, whose mining rights were revoked in April 2014 following a change in government in Guinea and allegations of bribery and misconduct on the part of BSGR. This resulted in two sets of arbitration proceedings: the LCIA proceedings brought by Vale, which resulted in the Award, and ICSID proceedings brought by BSGR against Guinea.

The Court was asked to consider the following applications:

• an application by Vale under s70(7) of the Act for security for the amount payable under the Award (the s70(7) Application);
• an application by Vale under s70(6) of the Act for security for its costs in respect of the Challenge Application (the s70(6) Application);
• an application by BSGR to set aside the Enforcement Order or to stay the enforcement thereof (the Set Aside Application); and
• an application by Vale to impose as a condition of pursuing the Challenge Application that BSGR pay an outstanding costs order against it (the Costs Order Application).

The Court also considered BSGR's application to amend its claim form in respect of the Challenge Application, but this was readily granted and is not considered further below.

BSGR went into administration in March 2018 and two joint administrators were appointed by the Court of Guernsey, one of them being a partner of BDO LLP, whom Moulder J found to be "an experienced insolvency practitioner at a leading accountancy firm".

(i) Vale's s70(7) Application

S70(7) of the Act, which applies to any application or appeal under ss67, 68 or 69 of the Act, provides that "The court may order that any money payable under the award shall be brought into court or otherwise secured pending the determination of the application or appeal, and may direct that the application or appeal be dismissed if the order is not complied with".

The Court, applying Progas v Pakistan [2018] EWHC 209 (Comm), considered that Vale had to show that the Challenge Application would prejudice its ability to enforce the Award or diminish BSGR's ability to honour it. As when applying for a freezing injunction, this meant showing that there was a risk of dissipation of assets between the time of the Challenge Application and its final disposal.

The Court found that no such risk had been established by Vale, and accordingly dismissed Vale's s70(7) Application. The Court's reasons notably included its refusal to accept Vale's submission that BSGR's administrators were not acting independently and in accordance with their duties. The Court noted further that several of Vale's complaints did not go to the risk of dissipation but to Vale's ability to enforce the Award, and that as observed by Teare J in X v Y [2013] EWHC 1104 (Comm), "the jurisdiction conferred on the court by section 70 [of the Act] should not be used a means of assisting a party to enforce an award which has been made in its favour".

(ii) Vale's s70(6) Application

Vale's entitlement to an amount by way of security for its costs pursuant to s70(6) of the Act was not disputed, nor were the principles to be applied by the Court in determining how much Vale would be likely to recover in a detailed assessment if awarded costs on the standard basis.

Vale submitted, however, that there was a real possibility that costs would be awarded on the indemnity basis. The Court disagreed: in its view, on the evidence before it, Vale would be unlikely to succeed in any argument that the administrators had improperly pursued the Challenge Application such as to warrant an order for indemnity costs.

The Court ordered that US$510,000 be provided by way of security for Vale's costs of the Challenge Application. In its view, given the issue to be determined in the Challenge Application, Vale's estimated number of hours and the resultant figure of US$880,000 for a two-day hearing could not be said to be reasonable and proportionate.

(iii) BSGR's Set Aside Application

Pursuant to CPR 62.18(9), BSGR had the right to apply, as it had done, to set aside the Enforcement Order, which had been made under s66 of the Act. CPR 62.18(9) provides in relevant part that:

"(a) the defendant may apply to set aside the order; and

(b) the award must not be enforced until after…any application made by the defendant…has been finally disposed of" (emphasis added).

The Court rejected BSGR's submission that this meant that the Award could not be enforced until the Challenge Application had been determined. In its view, the words "any application" referred back to any application to set aside under paragraph (a), not to any other application such as a challenge under s68 of the Act, and this was consistent with the authority (Peterson Farms Inc v C&M Farming [2003] EWHC 2298 (Comm)) that an award has "presumptive validity" unless and until set aside.

The issue for the Court was therefore whether it should exercise its discretion to order a stay on enforcement pending the determination of the Challenge Application – there being no general rule that a stay should automatically be granted merely because an appeal is pending – and the Court was not persuaded that it should do so. Whilst the parties disagreed as to the principles to be applied by the Court in exercising such discretion, in the Court's view, the outcome would be the same whether it applied CPR 83.7 (which governs the power of the court to stay execution of a judgment or order) by analogy or the principles identified in Socadec SA v Pan Afric Impex Co [2003] EWHC 2086 (Comm) (which, like this case, related to an application to suspend an order for enforcement which had been made under s66 of the Act).

(iv) Vale's Costs Order Application

Vale submitted that BSGR's administration had not been recognised in England and therefore its status was not a reason to withhold ordering payment of the outstanding costs order; alternatively, that payment should come from those standing behind BSGR.

In the Court's view, even if it did have the power to impose such a condition, it was not appropriate to do so in circumstances where the company was in administration, irrespective of the fact that the administration had not been recognised in England. The Court was not satisfied that the administrators could comply with such an order, but even if they did, as a matter of comity and public policy, the Court should not exercise its discretion and require BSGR to act in a way which was contrary to the principle of pari passu distribution. The Court accordingly refused Vale's Costs Order Application.

Comment

As this decision shows, where an unsuccessful party in an arbitration has gone into administration and its administrators challenge the award under the Act, while enforcement of the award will not necessarily be stayed pending the determination of the challenge, the award creditor will likely struggle to obtain any further assistance from the Court. Indeed, if the Court finds the administrators to be acting independently and in accordance with their duties to act in the best interests of the company and the creditors as a whole, it is unlikely to find there to be a risk of dissipation of assets or be prepared to require the administrators to act in a way contrary to the principle of pari passu distribution.

This case accordingly provides a cautionary reminder of the importance of considering, from an early stage of a dispute against a counterparty in financial difficulties, all the options available to maximise the chances of recovering any loss and damages from that counterparty.

For more information, please contact Craig Tevendale, Partner, Naomi Lisney, Senior Associate, or your usual Herbert Smith Freehills contact.