TMT Asia Ltd v Marine Trade SA [2011] EWHC 1327 (Comm) (25 May 2011)

Neutral Citation Number: [2011] EWHC 1327 (Comm) Case No: 2010 FOLIO 386 IN THE HIGH COURT OF JUSTICE QUEEN'S BENCH DIVISION COMMERCIAL COURT Royal Courts of Justice Strand, London, WC2A 2LL 25/05/2011 B e f o r e : MR JUSTICE DAVID STEEL ____________________ Between: TMT ASIA LIMITED Claimant - and - MARINE TRADE S. A. Defendant ____________________ MR JONATHAN CROW QC & MR JAMES LEABEATER (instructed by INCE & CO LLP) for the Claimant MR MARK HAPGOOD QC & MR JAMES WILLAN (instructed by Berwin Leighton Paisner LLP) for the Defendant Hearing date: 4th May 2011 ____________________ HTML VERSION OF JUDGMENT ____________________ Crown Copyright © MR JUSTICE DAVID STEEL : Introduction Between 24 October 2007 and 25 April 2008, TMT Asia Limited ("TMT") and Marine Trade S. A. ("Marine Trade") entered into a number of FFAs with contract months in 2009. It follows that the relevant period straddled the dramatic fall in freight rates in the autumn of 2008. By April 2009, TMT was substantially " in the money " but Marine Trade stopped paying sums when they fell due. In the result, TMT purported to terminate the FFAs as from 3 June 2009 and claimed US$52,731,642 from Marine Trade. TMT now seeks summary judgment on that claim. Whilst it is common ground that the market was in TMT's favour as the "seller" and that Marine Trade did not pay the sums demanded, Marine Trade resists the application for summary judgment by asserting that it has three arguable defences to its claim. In summary, the alleged defences are as follows: a) Marine Trade are arguably entitled to avoid the FFAs by reason of a misrepresentation on the part of TMT that it was not affected by an event of default at the time the FFAs were entered into. b) TMT was arguably subject to an Event of Default on the due dates for payment and thereby Marine Trade is under no liability in respect of the sums said to be due and further is entitled to counterclaim for restitution of sums paid in respect of payments made under FFAs effective in both 2008 and 2009. c) TMT is arguably estopped from relying on any right to terminate the FFAs for non-payment. Before considering the potential merits of these defences, I must briefly summarise the background. The terms of the FFAs were identical in all relevant respects. They do not need to be recited in any detail save to note in passing that payment of the monthly settlement sum was due no more than five business days after the settlement date. Importantly the agreement incorporated by reference the 1992 ISDA Master Agreement with some modifications. This standard form required payments on the due date. If there was a failure to do so, and the failure is not remedied in three business days after notice of the failure was given, such constituted an " Event of Default ". However, the obligation to make payments on the due date is subject to a condition precedent that no " Event of Default or Potential Event of Default" in respect of the counterparty has occurred. This introduces the provision which is at the heart of the dispute it being an Event of Default if a party " becomes insolvent or is unable to pay its debts or fails or admits in writing its inability generally to pay its debts as they become due ". The only other parts of the ISDA Master Agreement that need to be referred to at this stage are those relating to representations. Each party expressly represented to the other (in the form of representation " deemed to be repeated…on each date on which a Transaction was entered into") to the effect that "that no Event of Default or Potential Event of Default…has occurred and is continuing ". With that introduction I turn to the arguability of the various defences advanced. Given the conclusion I have reached it is not appropriate to enter into any detailed discussion. It is well established that the burden on the applicant is to show that the defendant has no real prospect of successfully prosecuting the claim. The burden is accordingly a heavy one and if the burden is not discharged it is important not to prejudge the merits by way of a mini-trial. Misrepresentation Strictly speaking this aspect arises from an application to amend the Defence and Counterclaim. But the question whether the proposed amendment raises a pleadable issue is little different (save perhaps in terms of burden of proof) from the question whether it reflects an arguable defence in the sense of having a realistic prospect of success. Marine Trade asserts that TMT was subject to an Event of Default at all times between April 2008 and January 2010. But whatever may have been the situation earlier, it is contended by TMT that Marine Trade has no prospect of showing that TMT was subject to an Event of Default after 1 November 2008. However, it is appropriate to proceed on the basis that at the time of the issuance of the FFAs, TMT was arguably subject to an Event of Default having regard to the following matters which emerge from the evidence presently available (although by definition the bulk of material is entirely in TMT's hands):- a) By October 2007, it is Marine Trade's evidence that Mr. Su of Marine Trade was saying that he was losing money and did not know how to handle the situation. b) By June 2008 TMT was apparently in widespread default. c) That is the background to the concession that it is arguable that TMT was subject to an Event of Default between April 2008 and October 2008. d) The position during the period during which the FFAs were agreed (October 2007 to April 2008) remains unclear but by inference was no better. e) That inference is reinforced by the practice of diverting receivables to other TMT group outfits, a policy described by a former director of a TMT group company as reflecting a policy of siphoning money off so that the relevant FFA trading company could be allowed to fail if it suffered unsustainable losses. The potential legal consequences are twofold:- a) Marine Trade can legitimately argue that the situation was misrepresented by virtue of the terms of the ISDA 92 Agreement. b) In any event, any misrepresentation is itself an Event of Default which potentially precludes recovery. I would be minded to grant leave to amend and accordingly there must be trial of the misrepresentation issue in any event. Insolvency/bankruptcy I turn now to the issue that occupied the bulk of the argument at the hearing, namely whether it was arguable that TMT was subject to an Event of Default between 1 November 2008 and January 2010. This ties in with the counterclaim based on the assertion that TMT was subject to an Event of Default and thus Marine Trade is entitled to restitution because the settlement sums were paid in the mistaken belief that they were payable. The issue can be divided into two questions. First, was TMT arguably " insolvent " in the sense set out in the bankruptcy classification of Events of Default? Second, once such circumstances have arisen, does the condition operate arguably by way of suspension or solely by way of extinction of the claim (and if by suspension for how long)? The relevant condition precedent is whether TMT was arguably " insolvent or is unable to pay its debts or fails or admits in writing its inability generally to pay its debts as they became due ". As regards insolvency, it was common ground that this imported the concept of balance sheet insolvency and that TMT did not arguably fall within that category. Equally it was common ground that there was no relevant admission in writing as regards " cash flow insolvency ". It follows that the submission centred on the remaining potential conditions: a) " fails…generally to pay its debts as they become due ". b) " is unable to pay its debts…as they become due ". The feature of a) is that it finds no parallel in the insolvency legislation where a failure to pay debts is merely evidence of an inability to do so. TMT submitted that in regard to failure to pay it was important to have regard to the fact that the obligation in regard to payments was flexible. They were due not immediately but within a period of two to five days. Even then no Event of a Default in regard to the failure to pay arose until three days after notice of failure. This reinforced the need, it was submitted, for a commercial, flexible and realistic approach to any failure to pay on time, having regard to TMT's financial position as a whole, including its expected cash resources. In my judgment, Marine Trade was arguably correct that the Events of Default clause elevated a general failure to pay on time from mere evidence of an inability to pay to a default in itself. Such is consistent with the judgment of Flaux J in Marine Trade v. Pioneer Freight Futures [2010] 1 Lloyd's Reports 631 to the effect that what is involved is not a general failure to pay but evidence that the party has failed to pay a substantial volume of its debts on time. Bank statements produced by TMT have been analysed. It is common ground that somewhere in the region of 70 to 90% of the debts were paid late. The period involved was commonly in the range of two to four weeks. The explanation appears to be that any profit made by TMT on FFA transactions was immediately paid out to related companies and thus there was insufficient cash to pay debts as they became due. This itself makes out an arguable case of failure generally to pay debts as they became due, being apparently reliant on payment from its counterparties before doing so. In this regard it is of particular note that Teare J gave leave to amend to raise a similar plea as being arguable in Oceanbulk Shipping & Trading S. A. v TMT (Asia) Ltd . I do not regard the subsequent disclosure of the bank statements as undermining the analogy of the situation. This makes it strictly unnecessary to consider whether it is also arguable that TMT was unable to pay its debts as they became due. There was a significant amount of material to support the conclusion that TMT was not merely failing to make payment as liabilities came due, but was in fact unable to do so. Furthermore, there was material to establish that it was an inability that was self-induced: a) There was evidence of widespread default in the period up to August 2008. b) Although thereafter the freight market moved dramatically in TMT's favour, there were significant counterbalancing difficulties arising from group shipbuilding and chartering activities. c) These difficulties in regard to related companies in the group were met by transfers of profit from TMT: it is questionable whether it is appropriate to categorise these transfers as loans let alone whether the related companies are in a position to repay. d) Indeed there is hearsay evidence from a former director of a TMT group company that these transfers were in any event consistent with a policy of minimum tax exposure of TMT whilst leaving it with no funds to pay its debts as they became due. e) In the result, save for one month, there was insufficient cash to pay amounts due to FFA counterparties on the due date throughout the relevant period. It is accordingly arguable that TMT was unable to pay its debts as they became due. Suspension v. Extinction It is a topic which has been addressed by no fewer than three judges: i) In Marine Trade v. Pioneer Freight Futures [2009] 1 Lloyd's Rep 631, Flaux J decided obiter that the extinctive construction was to be preferred. ii) In the Lehman Brothers litigation [2010] EWHC 3372 (Ch) , Briggs J held obiter " on a fairly narrow balance " that the suspensory construction was to be preferred. iii) In Pioneer Freight Futures v. TMT Asia [2011] EWHC 778 (Comm) , Gloster J expressed a preference (yet again obiter ) for the conclusion reached by Briggs J, an outcome ironically contrary to the submissions of TMT. This is a paradigm situation in which it would not be appropriate to reach a concluded view on a summary judgment application, all the more so where Gloster J gave leave to appeal (albeit on a conditional basis). In any event the issue may never arise. The identity of any relevant months subject to an event of default must be identified first. Estoppel From Marine Trade's perspective this is a make-weight point which I will not in the circumstances develop. It did not appeal to Flaux J in Marine Trade v. Pioneer Freight Futures supra. Conclusion For all these reasons the application for summary judgment is dismissed. BAILII: Copyright Policy | Disclaimers | Privacy Policy | Feedback | Donate to BAILII