UK: English Court Of Appeal Upholds "The Gibbs Rule"

Last Updated: 28 February 2019
Article by Kay V. Morley and Sarah Archer

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.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions