Cross-border restructuring conundrum: The current position for restructuring professionals following The OJSC International Bank of Azerbaijan

Authors: Bernie Walrut, Safiyya Khan Publication | October 23, 2018

Earlier this year, the English High Court (EHC) delivered its judgment in Gunel Bakhshiyeva (in her capacity as the Foreign Representative of The OJSC International Bank of Azerbaijan) v Sberbank of Russia & 6 Ors [2018] EWHC 59 (Ch) (IBA Case) dismissing an application by the International Bank of Azerbaijan (IBA) for a permanent stay against creditors exercising their rights under English law governed contracts, contrary to the terms of a restructuring proceeding governed by Azeri law.

This decision by the EHC in respect of the IBA Case has reaffirmed the longstanding position thatthe discharge of an English law governed debt under the insolvency laws of a foreign jurisdiction outside of England and Wales is not a valid discharge of such debt, with the EHC noting that the request for a permanent stay, if granted, would operate the same as a discharge of a debt. In this respect the EHC followed the decision in Antony Gibbs & Sons v Sociětě Industrielle et Commerciale des Mětaux (1890) 25 QBD 399 (Gibbs). The Court also held that the Cross-Border Insolvency Regulations 2006 (CBIR) could not be used to modify the rule in Gibbs.

This article will consider the impact of the decision in the IBA Case on the legal position in Singapore, Hong Kong and Australia, including the key legal and practical implications of this judgment for restructuring professionals.

The rule in Antony Gibbs

The rule in Gibbs was summarised by Professor Ian Fletcher in The Law of Insolvency (5th Edition) at para 30-061 as follows:

According to English law a foreign liquidation—or other species of insolvency procedure whose purpose is to bring about the extinction or cancellation of a debtor’s obligations— is considered to effect the discharge only of such of a company’s liabilities as are properly governed by the law of the country in which the liquidation takes place or, alternatively, of such as are governed by some other foreign law under which the liquidation is accorded the same effect. Consequently, whatever may be the purported effect of the liquidation according to the law of the country in which it has been conducted, the position at English law is that a debt owed to or by a dissolved company is not considered to be extinguished unless that is the effect according to the law which, in the eyes of English private international law, constitutes the proper law of the debt in question.

The facts in respect of Gibbs were as follows, Antony Gibbs entered into a contract to sell copper wire to La Société Industrielle Et Commerciale Des Métaux, a French company. The contract was expressed to be subject to the rules and regulations of the London Metal Exchange. The copper was to be delivered to an address in Liverpool and payment was to be made in cash in London against warrants. Before the order was completed by Antony Gibbs, La Société entered liquidation in France, by way of a judgment of judicial liquidation pronounced against it by the Tribunal of Commerce of the Seine.

Antony Gibbs commenced proceedings in England (it had proved in the liquidation in France) seeking an award of damages in respect of the loss sustained by it as a result of having to re-sell copper that the defendant was unable to accept. It was asserted by the defendant that the pronouncing of that judgment by the French tribunal, by the law of France, operated as a discharge of the defendants from liability to an action on the contracts.

The Court of Appeal unanimously rejected the argument of the defendant, holding that the parties did not agree to be bound by French law (including French insolvency law), as the governing law of the contract was English and that, similarly, a foreign composition is not regarded as effective unless it operates as a discharge according to the law of the debt.

The IBA case

The OJSC International Bank of Azerbaijan is the largest commercial bank in Azerbaijan. IBA's largest shareholder is the Government of Azerbaijan; its registered office and headquarters are situated in Baku, Azerbaijan and it is managed from its headquarters in Baku.

In May 2017, IBA encountered financial difficulties and entered into a voluntary restructuring proceeding in Azerbaijan, governed by Azeri law, to restructure approximately $3.34 billion of its financial indebtedness (Restructuring Proceeding). The purpose of the Restructuring Proceeding was to allow the IBA to restructure its debts.

On 5 May 2017, the foreign representative in the restructuring, Ms Gunel Bakhshiyeva, applied to the EHC seeking recognition of the Restructuring Proceeding as a foreign main proceeding.

On 7 June 2017 Ms Bakhshiyeva successfully obtained recognition of the Restructuring Proceeding as a ‘foreign main proceeding’ pursuant to the CBIR. The recognition order had the effect of imposing a moratorium on creditors, preventing them from commencing or continuing any action in England against IBA or its property (without the permission of the court) during the Restructuring Proceeding. 

The restructuring plan proposed by IBA pursuant to the Restructuring Proceeding was approved by a substantial majority at a meeting of creditors in Azerbaijan on 18 July 2017. It was thereafter approved by the Nasimi District Court on 17 August 2017. As a matter of Azeri law, the plan became binding on all affected creditors, including those who did not vote and those who voted against the plan.

Subsequently the IBA made an application for recognition of the restructuring plan in England after it had received approval in Azerbaijan. It is this application which resulted in the decision in the IBA Case. The IBA sought orders that the moratorium imposed pursuant to CBIR be extended indefinitely which would, in effect, see English law governed claims being permanently compromised and released. The application was opposed by Sberbank and Franklin Templeton (Respondents), both of whom held English law governed claims against the IBA and, importantly, did not participate in the Azeri restructuring proceeding at all.

The central issue was whether an order indefinitely extending the moratorium under the CBIR would infringe the rule in Gibbs. The IBA argued no as there would be no ‘discharge’ of debt and that the moratorium would act as a ‘procedural’ bar to Sberbank and Franklin Templeton enforcing their claims. Sberbank and Franklin Templeton relied on the rule in Gibbs and argued that any permanent stay on their enforcement rights would operate as discharge of their claims.

The decision

Before proceeding, it is important to note that the decision of Hildyard J in the IBA Case is currently on appeal and due to be heard in late October 2018. The EHC held that:

  1. the relief sought by the IBA was not purely procedural in nature as any such order (for a permanent stay) would have the effect of discharging Sberbank and Franklin Templeton’s substantive rights under the English law governed contracts; and
  2. the provisions of the CBIR do not enable English Courts to vary or discharge these substantive rights, with the effect that the court had no jurisdiction to make the orders sought. Hildyard J went further by saying that even if the court had jurisdiction, he would not exercise his jurisdiction to make the orders sought because, among other reasons, the court was bound to apply the rule in Gibbs and procedural side-stepping was not appropriate (in place of following substantive provisions of English law, be they common law or statute).

The position in Hong Kong

The law, as it currently stands in Hong Kong, is that a debt governed by Hong Kong law cannot be discharged or compromised by a foreign insolvency proceeding unless, broadly speaking, the creditor participates in that foreign insolvency proceeding (see for example, Hong Kong Institute of Education v Aoki Group (No 2) [2004] 2 HKC 397).

As a result, the IBA Case has not disturbed the position in Hong Kong. As a result, it is likely to continue to be the case that:

  1. a debt governed by Hong Kong law cannot be discharged or compromised by a foreign insolvency proceeding unless, broadly, the relevant creditor submits to the foreign insolvency proceeding; and
  2. Hong Kong creditors’ rights under Hong Kong law governed debt can only be compromised in a Hong Kong law governed process.

Accordingly, in circumstances where there is a foreign insolvency proceeding on foot, a parallel scheme of arrangement in Hong Kong (albeit adding to the cost of the restructuring process) is likely to be necessary in order to overcome uncertainty in respect of outlier creditor claims.

The position in Singapore

In July 2016, the Singapore High Court departed from the rule in Gibbs in Re Pacific Andes Resources Development Ltd [2016] SGHC 210. That proceeding involved an application for a moratorium on proceedings brought against debtor companies on the basis that the companies intended to enter into schemes of arrangement in Singapore. The relevant debts were governed by Hong Kong law.

The creditors argued, amongst other things, that the Court should not assume jurisdiction over the applications given that the debts were governed by Hong Kong law and that any discharge of the debts in Singapore would not be recognised in Hong Kong. The court rejected this argument on the basis that, if it has subject matter jurisdiction (assuming there is a sufficient nexus to Singapore to establish that jurisdiction, such as the location of assets in Singapore), then debts which are not governed by Singapore law may be compromised in a Singapore scheme of arrangement.

One of the arguments relied on by the debtor companies was that the Gibbs rule is in inconsistent with the modern approach of courts which recognises that there should be a universal approach to bankruptcy law (known as universalism). The basis for this rationale is that there should be one rule governing the distribution pari passu to creditors. The practical impact of this decision is that it will not be necessary to run parallel schemes in Singapore (subject to certain criteria – such as assets being located in Singapore) and will result in substantial cost savings for debtor companies.

The position in Australia

The decision in the IBA Case is not binding in Australia and has not been considered in any detail in Australia. Further, the decision in Gibbs has also only received obiter consideration in Australia. While the decision in the IBA Case is not binding in Australia it may be persuasive, particularly when an appeal decision in the IBA Case is delivered.

From an Australian perspective, specifically in the Asia Pacific region, where a proposed restructure seeks to compromise or release claims where some of those claims are governed by Hong Kong or English contracts, there will be significant complexity, given the ineffectiveness of any releases or compromises in Australia. The complexity will likely arise by reason of the need to commence parallel proceedings in other jurisdictions still following the rule in Gibbs.

Practical implications and solutions

In respect of the practical implications on cross border insolvency proceedings, the rule in Gibbs is likely to be relevant if a specific set of circumstances exists, such as English law governed contracts.

It is an exception to the Gibbs rule if the relevant creditor submits to the foreign insolvency proceeding (i.e. if the creditor elects voluntarily to participate in the restructuring proceeding). As a result, negotiations with the creditor to encourage them to participate in the restructuring proceeding could be helpful. However in practice it is difficult to see why a creditor would agree to this. Even if the creditors that hold English law claims elect not to participate, presence in the home jurisdiction of the restructuring proceeding (through a branch office or otherwise) may enable the debtor to seek an injunction or similar relief from the home jurisdiction court against the creditor to compel them to submit to the plan.

Even if the creditor does not voluntarily submit to, or is not compelled to participate in, the voluntary restructuring proceeding, practically, it would only be worthwhile for the creditor to pursue such a claim in England in circumstances where there are assets of the foreign debtor in England.

Despite the fact that the Gibbs rule arose out of facts which clearly involved a liquidation scenario, in the IBA Case the court accepted that the Gibbs rule may have limited scope in the context of a foreign liquidation (given creditors would be unable to execute against the debtor’s assets in England). Arguably, Re HIH Casualty and General Insurance Ltd [2008] 1 WLR 852 is an example of a case which shows that a foreign proceeding by way of terminal liquidation (as opposed to restructuring as a going concern) seems more likely to be supported by the English courts.

Nonetheless, it is necessary to consider the practical implications of the Gibbs rule in Australia, particularly with respect to the effectiveness of a restructuring in Australia that involves releases of claims against the debtor governed by foreign laws (especially England and Hong Kong), which may be of significant importance in a cross border restructuring. One particular concern is that the IBA decision may be relevant to an Australian court’s discretion to approve a scheme (ie ineffectiveness in England would be a factor against approving the scheme – see for example:Re Reodenstock GmbH [2011] EWHC 1104 (Ch). A potential solution may be for the debtor to run a parallel English scheme of arrangement (although, as mentioned earlier, there may be significant costs associated with this).

Despite all of the concerns raised in the commentary about the archaisms of the Gibbs rule, the decision by the EHC to follow the Gibbs rule in the IBA Case is likely to be seen favourably by creditors, who can take comfort in the fact that the law currently stipulates that foreign insolvency processes cannot be used to modify or compromise English law governed claims. Accordingly, creditors seeking certainty may want to adopt English law as the governing law for cross border transactions.


Contacts

Bernie Walrut

Bernie Walrut

Sydney