Paris Court of Appeal, No. 17/15605

Paris Court of Appeal, Pole 1 - First Chamber, 22 January 2019, No. 17/15605

KLESCH GROUP LIMITED , KLESCH CHEMICALS LIMITED
vs.
SA ARKEMA FRANCE

Under an agreement dated 23 May 2012 (SPA for share purchase agreement), the French company Arkema France SA sold to the Maltese company Klesch Chemicals a company called Kem One Holding, which owned three wholly-owned subsidiaries, including Kem One SAS. On the same day, a Joint Guarantee Agreement was signed between Arkema and Klesch Group whereby the latter undertook to guarantee certain obligations of Klesch Chemicals B arising from the SPA.

The sale was effectively completed on 2 July 2012 for 1 euro, with Arkema France providing pre-closing financing of 96,500,000 euros for the transferred companies. Subsequent to this date, Arkema granted advances to Kem One Holding which resulted in the signature of amendments.

Kem One SAS faced financial difficulties which led to its receivership by a decision of the Lyon Commercial Court on 27 March 2013. A business continuity plan was adopted by a judgment of 20 December 2013. It provided for the sale by Kem One Holding to a third party of Kem One SAS and Kem One Innovative Vinyls at a price of one euro each, and for debt write-offs or debt restructuring by creditors.

At the same time, on 4 March 2013, Klesch Chemicals filed a request for arbitration with the International Chamber of Commerce to obtain an award ordering Arkema France, on the basis of fraud and breach of the pre-contractual information obligation, to pay the sum of 310,000,000 euros plus interest corresponding to the amount of financing that Kem One Holding should have received if the seller had fulfilled its obligations to inform.

Arkema France requested the joinder of Klesch Group and made counterclaims against the two Klesch Chemicals companies for payment of damages in the amount of 207,579,372 euros.

By an award issued in Paris on 24 November 2015, the arbitral tribunal, composed of Messrs. E-F and C, arbitrators, and Mr. X, chairman, ruled, on the main claims, that Arkema did not commit any fault towards G, and on the counterclaims, that Klesch Chemicals was neither liable for Arkema’s losses related to the Vauvert mine, nor for losses related to the receivership, nor for any damage to Arkema’s reputation. However, the tribunal concluded that Klesch Chemicals had to pay Arkema the sum of 73,640,928 euros in respect of the invoices that Kem One failed to pay to Arkema, in addition to USD 375,000, representing 75% of Arkema’s share of the arbitrators' fees and costs and the arbitration administration costs, and EUR 4,818,816, 75 in respect of the costs incurred by Arkema in its defence.

Klesch Chemicals and Klesch Group filed an application for setting aside the award on 9 December 2015.

By an order of 17 March 2016, the Pre-trial judge dismissed the claimants' request for a stay of the enforcement of the award.

On 20 April 2017, the proceedings were suspended (in French: Retrait du rôle). It was restarted on 8 August 2017.

By pleadings notified on 16 November 2018, the claimants requested the court to set aside the award for breach of international public policy and to order the opposing party to pay them the sum of EUR 160,000 pursuant to Article 700 of the Code of Civil Procedure. On the one hand, they claim that Arkema France committed procedural fraud by claiming before the arbitrators that it agreed, as part of the recovery plan, to waive its claims against Kem One, when in fact it assigned these claims to a third party, and on the other hand, that the arbitral tribunal violated the provisions of international public policy in Articles L. 631-1 et seq. and L. 626-11 of the French Commercial Code by not taking into account the business continuity plan of Kem One SAS which provided for this waiver of claims.

By submissions notified on 27 November 2018, Arkema requested the court to declare that Klesch Group has no standing to sue, to dismiss the set aside the award as well as all the claims of Klesch Chemicals and Klesch Group, and to order these two companies jointly and severally to pay him the sum of 200,000 euros pursuant to Article 700 of the Code of Civil Procedure.

The arbitral tribunal ruled that only one of the claims made by Arkema was valid, the claim relating to the unpaid debts of Kem One Upstream, which Klesch Chemicals had undertaken to pay, but that the payment guarantee taken out by Klesch Group did not cover this point. Consequently, the tribunal ordered Klesch Chemicals alone to pay Arkema an amount of 73,640,928 euros and refused the remainder of the claims. However, the arbitrators ordered ‘Klesch’ to pay part of Arkema’s arbitration and legal costs. According to paragraph 3 of the award, the first claimant (Klesch Chemicals) and the second claimant (Klesch Chemicals H) are referred to hereinafter as ‘the Claimants or Klesch’. It follows that the award to pay the costs weighs on both companies, so that Klesch Group has an interest, and thus standing, in the annulment of the award.

The plea of inadmissibility is dismissed.

On the ground for annulment based on the violation of international public policy (Article 1520-5 of the Code of Civil Procedure):

The Klesch companies claim, firstly, that Arkema committed procedural fraud by producing in the arbitration proceedings the business continuity plan of Kem One SAS adopted on 20 December 2013, according to which it had agreed to waive its claim, without disclosing that it assigned the debts in question on 27 March 2014, i.e. on a date when the arbitration proceedings that led to the award of 24 November 2015 were still ongoing. The Klesch companies claim that withholding this information was directly relevant to the resolution of the dispute since it deprived them, on the one hand, of the possibility of claiming that Arkema lost the benefit of the guarantee on which it based its claim and, on the other hand, of the possibility of exercising the litigious redemption (in French: Retrait litigieux).

The Klesch companies argue, secondly, that the discharge of liabilities is a governing principle of collective proceedings, that Articles L. 631-1 et seq. and L. 624-24 et seq. of the French Commercial Code which provide that the rules applicable to the business continuity plan and the judgments which adopts this business continuity plan are a matter of public policy. The claimants allege, on the one hand, that the arbitral tribunal did not take into consideration that the waiver of the debt of Arkema established by the judgment adopting the business continuity plan, which, pursuant to Article L. 626-11 of the same Code, is binding on all, and that it thus violated international public policy. On the other hand, claimants allege that the arbitrators again violated international public policy by ordering Klesch Chemicals to pay the debts assigned by Arkema under the business continuity plan.

On the first part of the ground, Arkema replies, on the one hand, that it did not commit any fraud, that the judgment of continuity of Kem One SAS gave it an option between waiver and transfer of debt. Arkema adds that the transfer for a symbolic one euro to the buyer that was preferred for tax reasons, but that there was no intention to conceal from the arbitrators these measures taken in implementation of the business continuity plan. On the other hand Arkema argues that this information would not have any impact on the resolution of the dispute insofar as Klesch Chemicals commitment was neither a payment guarantee nor a security, but the cancellation of Kem One SAS’ debt.

On the second part, Arkema refers to Article L. 631-20 of the French Commercial Code and claims that the arbitral tribunal took the business continuity plan into consideration and that in any event, there is no evidence as to how the enforcement of the award would undermine international public policy.

On the first part of the ground:

Procedural fraud committed in the context of an arbitration may be sanctioned with regard to the procedural international public policy. It presupposes that false documents have been produced, false witness statements have been taken, or documents relevant to the resolution of the dispute have been fraudulently concealed from the arbitrators, so that the arbitrators' decision was misled;

In this case, the arbitration was initiated on the basis of Article 10.10 of the SPA which provided that the contract was governed by French law and that the arbitrators had to rule in law.

Article 9.1 of the same contract stipulates: ‘Debts assumed. In accordance with the terms and conditions set out in this Agreement, at Closing, the Buyer shall assume (i) the Transferred Debts and (ii) the Debts of the Transferred Companies, shall become liable for and shall pay them in due date and shall guarantee and cover the Seller and any other member of Group Arkema in respect thereof (and shall ensure that the Transferred Companies do the same), excluding in each case (i) and (ii), and notwithstanding anything to the contrary in the Contract or the Ancillary Agreements, debts which are the subject of Specific Indemnities or the existence of which would render inaccurate any of the Seller’s representations and warranties under this Contract, but including in any event ,unless otherwise agreed in this Contract, ‘Debts Expressly Assumed’ (translation from the English proposed by the Appellants and not disputed by Arkema).

Article 1.3 of the Third Amendment provides: ‘Obligations of the Purchaser. (i) In consideration of the Purchase Advances, the Buyer shall (y) pay or reimburse to the Seller on or before 31 October 2012, the amounts required to be paid or reimbursed to the Seller on such date pursuant to the provisions of the Second Amendment dated 3 August 2012 or of this amendment and, more generally (z) pay to the Seller on the due date any other amount due to the Seller, and shall ensure that the relevant Transferred Companies do the same.

On this basis, the arbitral tribunal ordered Klesch Chemicals to pay the sum of 73,640,928 euros, equivalent to the amount of the invoices that Kem One failed to pay to Arkema, considering that: ‘This liability is the result of a specific agreement entered into by Klesch Chemicals under the terms of Article 9.1 of the SPA and Article 1.3 (i) of the Third Amendment Agreement’.

With regard to Kem One, the award mentions:

‘125. After several meetings, the conciliation failed, and the Lyon Commercial Court placed Kem One into receivership on 27 March 2013. As part of this procedure, Arkema and Klesch Chemicals concluded a Memorandum of Understanding on 4 and 5 April 2013. Under the terms of this Memorandum of Understanding, the parties agreed that Arkema would pay Kem One Holding an overall post-closing adjustment of EUR 20 million, transfer EUR 10 million to Kem One as an advance payment of the QVC Indemnity Amount, and pay up to EUR 24.3 million to EDF and EUR 14.4 million to A on behalf of Kem One until the end of the observation period.

For its part, Klesch Chemicals waived the right to make further claims for post-closing adjustments or to challenge the validity of the SPA.

126. The Lyon Commercial Court also appointed an expert, Mr. Z, to assist the receiver. Mr. Z produced a report analysing the economic and cash flows up to 31 March 2013.

127. On 20 December 2013, the Lyon Commercial Court ratified a business continuity plan presented by Mr C and D Capital. As part of this business continuity plan, Klesch Chemicals undertook to transfer the downstream business to Mr C and D Capital. The transfer was not yet completed at the date of the hearing (8 to 12 December 2014) and the court Klesch Chemicals ordered Klesch Chemicals to proceed with the transfer’.

The award does not refer to any other element of Kem One’s business continuity plan and, in particular, makes no reference to the debt write-off that would have been granted by Arkema.

The judgment of the Commercial Court of Lyon was produced in the arbitration proceedings. Its operative part states:

Takes note of the waivers and/or assignments of receivables granted for a symbolic 1 euro and of the agreements relating to operating conditions entered into by the candidate buyers or Kem One with Arkema, LArkemaONDELLBASEL, EDF and A, in the context of the continuation of Kem One’s business and Kem One’s recovery plan.

Adopts the recovery plan proposed by Mr. I C in the name and on behalf of a company to be incorporated, Kem One H under the following conditions […].

It is summarised in the following summary tables: […]
Mr I C with the support of Open Gate Capital
Status as at 19 December 2013
Debt waivers/assignments
Arkema: 95.6 million euros
Written undertaking signed by Arkema to accept a waiver A of the pre-RJ claim and of any sums due in respect of guarantees provided to Kem One’s suppliers.
The draft agreement transmitted by Arkema will be transmitted with the designated purchaser’.

It is also common ground that the Klesch companies did not become aware until 16 March 2017, in the context of the present proceedings, of a contract concluded on 27 March 2014 between the ECSC company, a subsidiary of Arkema, K1 H SAS represented by M. C and Kem One. Under this agreement, K1 H SAS, ‘in accordance with the terms of an agreement dated 19 December 2013 concluded between Arkema France and Mr. I C as part of the plan for the takeover of Kem One by Mr. I C, assigns to Kem One all claims of all kinds prior to the decree initiating the receivership proceedings in exchange for the price of one euro.

It follows from the above-mentioned terms of the judgment establishing the business continuity plan that Arkema’s commitment could consist either in a waiver of a claim or in an assignment for a symbolic one euro, so that it has not been established that Arkema’s failure to produce the assignment agreement in the arbitration proceedings was fraudulent.

In any event, on the one hand, the award makes no reference to the undertakings to waive or assign the claims entered into by Arkema under the business continuity plan. On the other hand, the award takes care to qualify the ‘liability’ assumed by Klesch Chemicals under Article 9.1 of the SPA and Article 1.3 (i) of the Third Amendment Agreement as a ‘specific undertaking’ and not as a guarantee. Based on these elements, there is no evidence that the meaning of the award would have been different if the arbitrators had been aware of the assignment agreement.

Moreover, as regards the litigious redemption provided for by Article 1699 of the Civil Code according to which : “The person against whom a litigious right has been assigned may be discharged by the assignee, by reimbursing him the exact price of the assignment with the costs and loyal costs (in French: coûts loyaux), and with interest from the day the assignee paid the price of the assignment to him”, it presupposes that the litigious right has been assigned for a price which the party using the litigious redemption reimburses to the assignee of the claim in order to put an end to the dispute, which is not the case of an assignment granted for a symbolic euro.

The first branch of the ground is unjustified.

On the second part of the ground:

According to Article L. 626-11 of the French Commercial Code raised by the claimants: “The judgment which sets out the plan makes its provisions binding on all parties”. However, Article L. 631-20 of the same code states: “Notwithstanding the provisions of Article L. 626-11, co-obligated parties and persons who have granted a personal security interest or who have assigned or transferred property as security shall not be able to avail themselves of the provisions of the plan”.

The arbitrators were therefore under no obligation to take into consideration Kem One’s business continuity plan when ruling on a claim for payment against the Klesch companies. Klesch Chemicals B’s conviction does not result in any manifest, effective and concrete violation of the principles of international public policy relating to insolvency proceedings.

It follows from this that the ground must be dismissed in its two parts and the action for annulment set aside the award.

On Article 700 of the Code of Civil Procedure:

The companies G, which succumb, cannot benefit from the provisions of article 700 of the code of civil procedure and will be condemned on this basis to pay Arkema the sum of 200,000 euros.

FOR THESE REASONS:

Dismisses the plea of inadmissibility directed against the action of the company Klesch Group.

Dismisses the action to annul the award issued in Paris between the parties on 24 November 2015.

Orders Klesch Chemicals and Klesch Group jointly and severally to pay the costs which may be recovered in accordance with the provisions of Article 699 of the Code of Civil Procedure and to pay the sum of 200,000 euros to Arkema France SA pursuant to Article 700 of the Code of Civil Procedure.