Insights

The Gibbs Rule

English Court of Appeal Upholds "The Gibbs Rule"

In Short:

The Situation: In Bakhshiyeva v Sberbank of Russia, a debtor sought to restructure English law-governed debts pursuant to an Azerbaijani restructuring proceeding. In order to prevent certain dissenting creditors from commencing enforcement proceedings against the debtor in the UK, the debtor asked the English court to provide an indefinite stay.

The Result: The Court of Appeal reinforced the old English common law principle known as "the rule in Gibbs," which prevents debt obligations governed by English law being discharged by foreign insolvency proceedings without consent.

Looking Ahead: Gibbs has been heavily criticised on the basis that the concept of "universalism" has become a central tenet in achieving a successful cross-border restructuring. However, proponents of the rule argue that creditors enter into English law contracts to access the impartiality, commerciality and due process of the English courts. Given the continuing uncertainty in relation to Brexit, the upholding of the rule in Gibbs is likely to be of critical importance when determining international restructuring strategies involving English law documentation.

The Rule in Gibbs

The Gibbs rule is named for the case in which it was formulated: Antony Gibbs & Sons v La Société Industrielle et Commerciale des Métaux (1890) LR 25 QBD 399). Its effect is that, unless a creditor submits to a foreign proceeding, a foreign proceeding designed to bring about the cancellation of a debtor's obligations will discharge only those liabilities governed by the law of the country in which that proceeding took place.

In the context of the UK's current membership of the EU, Gibbs does not apply where an insolvency proceeding has been opened pursuant to the European Insolvency Regulation. However, following the UK's departure from the EU, the UK would need to make new arrangements with the EU to ensure the disapplication of the rule in Gibbs would continue. If no new arrangements are made, in the absence of consent, it will only be possible to amend English law documentation via English proceedings. The most likely consequence of this in a restructuring context is that a scheme of arrangement may be required in parallel with any local EU or other international insolvency proceeding.

Case Background

On December 18, 2018, the Court of Appeal provided its decision in the case of Bakhshiyeva v Sberbank of Russia [2018] EWCA Civ 2802.

The OJSC International Bank of Azerbaijan ("IBA") was in a voluntary restructuring proceeding in Azerbaijan pursuant to which its debts were to be restructured. Under Azerbaijani law, the restructuring plan became binding on all creditors once approved by the requisite majority. However, the debts included English law-governed debts where the creditors had neither participated in the restructuring nor submitted to the jurisdiction of the Azerbaijani court. As a result, pursuant to the English common law rule in Gibbs, the claims of the English creditors could not be discharged or otherwise affected by the Azerbaijani proceedings.

The foreign representative of IBA had successfully applied to the English court for recognition of the Azerbaijani proceeding as a foreign main proceeding under the Cross-Border Insolvency Regulations 2006 (the "CBIR 2006"), (which implemented the UNCITRAL Model Law on Cross-Border Insolvency (the "Model Law") in the UK). Recognition resulted in an automatic stay on enforcement action in the UK. Two creditors did not participate in the Azerbaijani proceedings and were instead seeking relief in the English courts. In order to prevent English enforcement proceedings undermining the successful outcome of the Azerbaijani restructuring, IBA applied for an indefinite continuation of the stay of enforcement actions, even after the restructuring had come to an end. IBA argued that the English court was empowered to grant a permanent stay under the CBIR 2006 as it was a procedural step taken to assist a foreign insolvency process, which would fetter the creditor's right to enforce their claim but would not discharge the claim itself.

At first instance, the court dismissed IBA's application. IBA then appealed to the Court of Appeal.

The Court's Decision

Acknowledging that the Court of Appeal was bound by Gibbs, the applicant effectively sought to circumvent Gibbs by seeking a permanent stay of the English law rights. This approach failed. The Court of Appeal dismissed the application, holding that:

  1. The permanent stay was not necessary to protect the interests of IBA's creditors (the requirement under the CBIR 2006 for the grant of appropriate relief) - IBA was trading again and the restructuring was at an end;
  2. The scope of the Model Law was limited to procedural aspects of cross-border insolvency cases – there was nothing in the CBIR 2006 to suggest that the procedural power to grant a stay could be used to extinguish the substantive rights guaranteed by Gibbs. Further, as the Supreme Court had held in Rubin v Eurofinance SA [2012] UKSC 46, the principle of universalism could not be used to justify the disregard of English law to assist a foreign insolvency process; and
  3. It would be inconsistent with the Model Law's procedural and supporting role for a stay granted under the CBIR 2006 to outlast the foreign proceedings to which the stay related.

The Court of Appeal also highlighted that the issues raised by the rule in Gibbs could have been dealt with in practice by promoting a parallel scheme of arrangement or some other mechanism in England. However, IBA chose not to do this.

IBA could appeal to the Supreme Court. However, in response to the Court of Appeal decision, the Azerbaijani Parliament has amended its restructuring laws so that IBA's proceedings are technically still continuing (even though the debtor has now been restructured on a going concern basis). As a result of the "ongoing" restructuring proceedings in Azerbaijan, the moratorium provided pursuant to the CBIR 2006 in the UK will technically continue, thereby preventing creditors in the UK from commencing or otherwise continuing separate proceedings against the debtor (or its assets) in the UK at this time.

Consequences

Subject to the decision being appealed, Gibbs remains good law for now, at least in the UK and Hong Kong (it was recently rejected in Singapore in the Pacific Andes Resource Development case).

The Gibbs rule is controversial because it arguably cuts across "universalism" (and "modified universalism") the premise of which is that a single set of proceedings should cover all aspects of a restructuring (with modified universalism allowing for multiple proceedings on certain grounds, which often relate to public policy).

Universalism contrasts with "territorialism", which sees separate proceedings for each jurisdiction in which valuable assets, debtors or creditors are located. Fueled by globalization, criticisms of territorialism have increased. Critics highlight:

  1. The risk that different proceedings produce different results;
  2. Different proceedings are unlikely to progress at a similar pace; and
  3. It can cause a "race of the swiftest" as different creditors seek to bring claims against assets before – and often without giving notice to – other creditors (often leading to unequal asset distributions).

Indeed, the Court of Appeal briefly acknowledged the criticisms levelled against the Gibbs rule in its decision. It highlighted, firstly, that the rule may be thought increasingly anachronistic in a world where the principle of modified universalism has been the inspiration for much cross-border cooperation in insolvency matters and has also been recognized as forming part of the common law. This view was recently expressed by Judge Martin Glenn of the US courts in the matter of Agrokor. Secondly, that the rule may be thought to sit rather uneasily with established principles of English law which expect foreign courts to recognize English insolvency judgments or orders, for example when an English scheme of arrangement is approved by the court.

However, there is an alternative view which supports the retention of the Gibbs rule. Creditors enter into English law contracts in order to access the impartiality, commerciality and due process the English courts are well known for. In economies which lack transparent legal systems or significant precedents, the Gibbs rule guarantees to creditors a stable, predictable and trusted legal system which will protect their rights. By ensuring that trusted legal mechanisms underpin agreements, without which credit may be unavailable, the Gibbs rule encourages investment. Further, the fact that Gibbs is good law is factored into the contract price – borrowers benefit from cheaper credit if lenders can rely on English law as being the sole applicable law. If Gibbs were overturned, there is an argument that this would leave lenders across the globe in an uncertain position. In relation to UK schemes, the English court does not arbitrarily assume jurisdiction and will only sanction a scheme of arrangement in circumstances where, amongst other things, it is satisfied that the jurisdiction of the English court will be recognized in the relevant local jurisdictions and that accordingly, any judgment of the court will not be made in vain.

Irrespective of the differing views on Gibbs, given Brexit and its potential ramifications for the UK, the confirmation of this rule at this time is particularly poignant and we await with eager anticipation the outcome of the Brexit negotiations and its potential implications for international cross-border restructurings.

Three Key Takeaways

  1. The case highlights the importance of dissenting creditors not participating in a foreign proceeding in circumstances where they intend to challenge jurisdiction in the UK.
  2. For now, the Gibbs rule remains in force – therefore, English law-governed debt can only be discharged by consent of the creditor or via an English law insolvency proceeding.
  3. Accordingly, parties should consider a parallel English scheme of arrangement in circumstances where a non-EU debt restructuring involves the discharge of English law-governed debt obligations. The position relative to EU restructuring after March 29, 2018 has yet to be determined.

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