The effect of insolvency on a charterparty

Insolvency alone is not enough to justify termination.

The insolvency of a party, the commencement of insolvency-related proceedings or the appointment of liquidators or receivers will not on its own amount to a repudiation or a renunciation of a contract subject to English law (see for example Re Agra Bank (1867) LR 5 Eq 160). There will, therefore, be no right to terminate a charterparty because of an event of insolvency affecting an owner or charterer. That is unless, of course, such an express right is reserved in the contract.

In order to have a right to terminate, the innocent party will either need to be able to show that the inevitable consequence of the event of insolvency is a repudiation of the charterparty, i.e. that there has been an anticipatory repudiatory breach, or that a liquidator (or similar officer or court) has stated clearly and unequivocally that a charter will not or cannot be performed in some respect going to the root of the contract i.e. there has been a renunciation (see Pacific and General Insurance Co. Ltd v. Hazell [1997] 1 L.R.L.R. 65 at 83).

It should be noted that an anticipatory breach must be proven in fact; having 'reasonable grounds' for believing a certain situation to be the case will not be enough. Whereas, the test in respect of a renunciation is whether a reasonable person in the position of the innocent party would consider that the insolvent party has clearly and absolutely evinced an intention not to perform (SK Shipping Pte Ltd v Petroexport Ltd [2010] 2 Lloyd's Rep 158).

In some situations it may be clear beyond doubt that an insolvent party's repudiatory breach of contract has become unavoidable, or that the contract has been renunciated. This could be the case, for example, where the insolvent party has been prevented by a court order from making any payments at all, or where notices are issued to all counterparts by the relevant officers making it clear that contracts will not be performed or adopted.

However, in many cases the situation will not be clear immediately. It is not thought that a failure by the relevant officer to confirm, when questioned, that a contract will be performed is enough where investigations and information gathering by the appointed officer are ongoing. However, such a failure may be renunciatory where it is clear that the relevant officer has all the necessary information at their disposal (as in SK Shipping). It is thought that where an insolvent party must apply to a court for permission to make any payments and where the contract in question is loss-making (and therefore permission would not be granted), or where the insolvent party has made it clear that no such application will be made, there may be sufficient grounds for terminating.

In such circumstances it should be noted that an innocent party would be entitled to rely, in support of a decision to terminate, on evidence of matters which were not known to them at the time although they already existed in fact.

Non-Performance as a result of insolvency - no automatic right to damages on termination

Of course, most time charters include an express right of termination for non-payment of hire. However, it is not clear in English law whether the non-payment of hire under a charterparty is in itself repudiatory. Therefore it will not follow that the fact that an owner has exercised his express right to terminate a charterparty for non-payment will mean that he has a claim for damages.

There is some indication in authority that an express right to terminate for a particular breach is indicative of the parties' intention to treat that breach as repudiatory i.e. as going to the root of the contract (Stocznia Gdynia SA v Gearbulk Holdings Ltd [2009] 1 Lloyd's Rep 461). Such an argument may be assisted by the fact that time is of the essence with respect to payments of hire under charterparties. However, that a claim in damages follows a failure to pay a single instalment of hire remains only arguable.

To remain on firmer ground with respect to a claim for damages, it will be necessary to establish a renunciation or repudiation of the charterparty, as discussed above. It is thought that a repeated failure to pay hire, either deliberately or through inability to pay, will also be sufficient to found a claim in damages.

Performance by a third party, for example a group company

Several recent insolvencies have involved one or more companies belonging to a larger group of companies, many of which have themselves remained in operation, apparently unaffected by the insolvency. Can a charterparty continue to be performed by a group company of an insolvent charterer?

In general, a debt will be discharged on payment by a third party if the payment is made as an agent of the debtor with either his prior authority or subsequent ratification. So, for example, payments of hire under a charterparty made by a charterer's group companies will stand as contractual hire payments so long as there has been authorisation by the charterer.

However, the appointment of a liquidator has the effect of extinguishing directors' powers and revoking prior authorities of agents. See for example Pacific and General Insurance v Hazell, where this was held to be the effect of the court order that "places the provisional liquidator in control of the company's assets and operations (whether with or without power to carry on its business)". So from that point onwards it would be up to the liquidator or receiver to authorise or ratify any third party payments and a creditor would have the right to reject a payment from a third party where they were aware that it had been made without authority.

Effect of recognition on arbitration and enforcement proceedings

When a winding up order is made or a provisional liquidator is appointed, no proceedings may be commenced or continued against the relevant company or its property, except by leave of the court and subject to such terms as the court may impose (section 130(2), Insolvency Act 1986). This applies equally to arbitration proceedings (see Enron Metals & Commodity Limited v HIH Casualty & General Insurance Limited [2005] EWHC 485). A similar restriction will apply in respect of foreign insolvencies recognised by the English court pursuant to Article 20(1), Schedule 1 of the Cross- Border Insolvency Regulations 2006 (SI 2006/1030).

It is likely that the court has the power to grant leave retrospectively where proceedings have been commenced without leave (see Re Linkrealm Ltd [1998] BCC 478).

Thor Maalouf

Associate in the London Shipping Group 

Reed Smith

Our thanks to Reed Smith for permission to reproduce this article from their August 2011 newsletter.

Staff Author