In the October International Restructuring Newswire we published an article on the High Court’s ruling in Gunel Bakhshiyeva (in her capacity as the Foreign Representative of The OJSC International Bank of Azerbaijan) v Sberbank of Russia & 6 Ors  EWHC 59 (Ch). In December 2018 the Court of Appeal unanimously upheld the High Court ruling. In this article we look again at the “rule in Gibbs” and provide an update on the Court of Appeal decision.
Despite ongoing criticism of the rule in Gibbs & Sons v Sociětě Industrielle et Commerciale des Mětaux (1890) 25 QBD 399 (Gibbs), English Courts have again confirmed that English law-governed debt cannot be discharged under a foreign insolvency proceeding unless the creditors have voluntarily submitted to that proceeding. The rule provides certainty to parties that choose English law that their contracts will not be modified or extinguished by any law other than the one they chose. Supporters argue that a creditor in the London financial markets may be less likely to trade with a foreign debtor if those English debts could be compromised by foreign restructuring measures not recognised in the EU.
The criticisms of Gibbs have centered on the conflict between its rule and the principle of modified universalism which strives for a unitary insolvency proceeding applying to all the assets and liabilities of the debtor world-wide. Proponents of universalism point to the practical benefit of providing distressed companies the opportunity to restructure under a single set of rules, without the cost and uncertainty of proceedings in different jurisdictions. The principle has formed the basis of much cross-border cooperation in insolvency matters and is given effect in a number of key jurisdictions, for example: in the EU, the EC Insolvency Regulation allows English law-governed debts to be modified by applicable EU proceedings; and, in the US, Chapter 15 of the US Bankruptcy Code enables US law-governed debts to be modified by foreign proceedings.
In the latest development in the OJSC case, the International Bank of Azerbaijan (IBA) made an application for an indefinite debt moratorium under an Azeri restructuring proceeding. The proceeding was recognized by the High Court as a main proceeding under the Cross Border Insolvency Regulations 2006 (CBIR), giving rise to an initial moratorium that prevented creditors from commencing or continuing any action against the IBA in England. The application to extend the moratorium essentially sought to restrain certain creditors (that did not participate in the Azeri restructuring proceeding and did not submit to the jurisdiction of
the Azerbaijani Court) from pursuing their claims in England once the Azeri restructuring proceeding had come to an end.
The Appellant argued that the application of the rule in Gibbs, was limited by the powers under Article 21 of the CBIR which provide that an English Court may grant any appropriate relief necessary to protect the interests of creditors (in effect, asking the Court to “sideline or circumvent the established common law rights of the English creditors by an appeal to the principle of modified universalism”). The Court assessed whether that moratorium was: 1) necessary to protect the interests of creditors; and 2) an appropriate means of achieving that protection.
The Court found that neither of those conditions were satisfied. Lord Justice Henderson said that extending the moratorium was not necessary to protect the interests of IBA’s other creditors as they had already received everything to which they were entitled under the Azeri restructuring proceeding (which was at an end). The Court also noted that:
- it was material that the IBA could have run a parallel scheme of arrangement but chose not to do so;
- there is nothing in article 21 of the CBIR to suggest that the procedural power to grant a stay could substantively circumvent the creditors’ English law rights; and
- extending the moratorium after the restructuring proceeding terminated would be inconsistent with the ‘procedural and supportive’ role of the Model Law.
The Court also acknowledged the adoption by UNCITRAL in July 2018 of a new model law on the recognition and enforcement of insolvency-related judgments, which specifically includes a judgment (i) confirming or varying a plan of reorganization or liquidation, (ii) granting a discharge of the debtor or of a debt, or (iii) approving a voluntary or out-of-court restructuring agreement. It is now for the UK to implement the new model law if—and in such form—it sees fit, which could provide much-needed legislative certainty on the matter.
The Appellant has applied for permission to appeal and reserved her right to challenge the Gibbs rule. We do not know whether the decision will be taken to the Supreme Court or whether the parties will settle.
Whilst this continues to be a dispute to watch, for the time being foreign entities running restructuring proceedings outside of the EU ought to consider whether it would be appropriate to run a parallel scheme of arrangement in England to compromise English debts (as was done in the recent case of Agrokor d.d. where a parallel scheme was used to restructure English debts within Croatian insolvency proceedings) or otherwise run the risk of creditors attempting to unwind restructuring efforts carried out in foreign jurisdictions.