Tenacity Marine Inc v NOC Swiss LLC

A mandatory order enforcing a maritime letter of indemnity will not be discharged merely because the obligor is technically insolvent. The obligor must prove, on the balance of probabilities, that compliance is impossible. The evidence must be full and frank, and must address the underlying financial realities, including whether shareholders, lenders or other closely connected persons could provide funds. A court may consider continuing lender support and the commercial interests of secured creditors. Potential future reversal of a payment under foreign insolvency law does not make present performance legally impossible. The order should remain where the obligor has failed to establish either financial or legal impossibility.

The defendant applied to discharge mandatory orders requiring it to provide security under letters of indemnity issued in connection with the delivery or sale of hydrocarbon cargoes without production of original bills of lading.

The defendant, a UAE company, contended that it was hopelessly insolvent, could not comply financially, and would breach UAE law or expose its directors and restructuring officer to criminal liability if it complied. The claimants argued that the defendant continued trading with lender support and had not shown that funds could not be obtained from those lenders. The central issues were whether compliance was financially or legally impossible.

1. Application dismissed. The defendant failed to prove that compliance with the mandatory orders was financially or legally impossible.
2. An obligation under a maritime letter of indemnity is capable of enforcement by mandatory order because damages will generally be inadequate. A court will not order or continue to order an act which is impossible, but the party asserting impossibility bears the burden of proving it on the balance of probabilities. Nothing short of impossibility is sufficient. The evidence must be full and frank.
3. Financial impossibility must be assessed by reference to the underlying realities of the company’s financial position. Mere assertions are insufficient. The court may consider whether funds would be made available by shareholders, lenders or other closely associated persons, applying by analogy the principles concerning security for costs. The defendant had not approached the lenders who were supporting its continued trading and stood to gain substantially from the restructuring. It therefore failed to prove that such funding would not be available.
4. Technical insolvency did not establish impossibility. The defendant continued to trade by collecting receivables and selling inventory. The evidence concerning pari passu charges was inconsistent and did not show that those charges prevented the use of realised funds to meet the indemnity obligations.
5. The possibility that a UAE court might later reverse a transaction under UAE Federal Law No.9 of 2016 did not make present performance unlawful or impossible. The relevant bankruptcy proceedings had not commenced. Nor was criminal liability established: the statutory provisions required circumstances that were not shown, and the defendant was continuing to meet liabilities as they fell due, with lender support.