The Gibbs Rule, coined in 1890 by the English Courts, is a long-established common law principle wherein the Queen's Division Bench, determined that a debt governed by English law cannot be discharged or compromised by a foreign insolvency proceeding. This statement thus stands to reason that unless otherwise a creditor submits to a foreign proceedings, the said proceedings which have been designed to bring about the cancellation of a debtors' obligations, would only be restricted to discharging of those liabilities that are otherwise governed by the law of the country, wherein the proceedings have been instituted and carried out.
It ensures contracts governed by English law remain unaffected by foreign insolvency processes unless parties consent. As per Gibbs the creditor who is governed by English Law will not appear or vote in the foreign proceedings, especially if the claiming percentage is not fully paid. Thus the English creditors deploying this strategy become successful rent-seekers, ensuring that their windfall profits will come at the expense of other stakeholders.
The above gives abundant clarity to one aspect: the Gibbs approach gives inappropriate weightage to party autonomy: that a foreign discharge's effect should not depend on rules based on consent, as a restructuring can be imposed without the need for consent, but rather on whether there's a proper and sufficient connection between the debtor and the restructuring jurisdiction
Therefore, the Gibbs Rule is against equity and good conscience not only against Indian jurisdiction but also with several other countries that have adopted the Model Law principles of UNCITRAL because only a jurisdictional court where proceedings are instituted could discharge the debt governed by such jurisdictional law, which is prima facie discriminatory.
Drawbacks of the Gibbs Principle in Insolvency Proceedings
Insolvency Law celebrated scholar, Professor Ian Fletcher has widely critiqued the Gibbs Principle as anachronistic, stating it "belongs to an age of Anglocentric reasoning which should be consigned to history." Nonetheless, practitioners often support the principle as it enables English courts to serve as a forum of choice for intricate cross-border restructurings, particularly where other forums might yield inferior outcomes.
The Gibbs Principle, by mandating that debts governed by the jurisdictional law only where proceedings are instituted, significantly reduces global economic value and breeds inefficiency. It compels parties to pursue duplicative and insufficient insolvency proceedings, restricted to a particular jurisdiction. This principle stands in stark contradiction to:
(I) Model Law on Cross-Border Insolvency,
(II) Forum shopping principles,
(III) The Applicability of Lex Fori.
A debtor may only avoid this windfall by spending time and resources filing a complicated, concurrent English proceeding. . The Investors, often exploit this principle, as it aims to secure them returns through enforcement rather than by adding genuine economic value. This results in substantial legal costs for the debtor, which are ultimately borne by other creditors and stakeholders, undermining the core objective of restructuring revival, not profit extraction.
The Hon'ble Supreme Court of the United Kingdom in Rubin v Eurofinance S.A., noted that "there is no connection between the exercise of jurisdiction by the English court and its recognition of the jurisdiction of foreign courts." The particular cases deals with a genuine situation wherein the debtor seeking discharge, was required to prove to the creditor that they had participated in the proceedings, yet the Ld. Court failed to define what constituted "participation" This ambiguity exacerbates the complexity and cost of proceedings.
The ambit of pursuing insolvency proceedings outside the jurisdictions of the debtor's Centre of Main Interests ("COMI") implies that the creditor accepts that it will "incur the political, social, and legal risks" of the debtor's home country, which would include the assertion of jurisdiction and the application of foreign insolvency law.
However, from the Indian Insolvency Regime, which is concomitant to Model Laws and thus shares the common ideology of insolvency regimes across various jurisdictions, does note the following drawbacks of Gibbs' Rule vis-à-vis its application to the evolving Cross Border Insolvency scheme:
- Outdated Doctrine-The Gibbs Principle undermines the doctrine of "modified universalism," essential for effective modern cross-border insolvency proceedings.
- Parallel Proceeding-The principle obliges parties to conduct parallel insolvency proceedings resulting in unnecessary expenses, delays, and execution risks.
- Superseding Party Autonomy: During financial distress or insolvency, the parties' freedom to choose the governing law of their contractual relationship should yield to the rules and outcomes of collective creditor proceedings pertinent to the debtor's circumstances, a factum completely amiss in the English Restructuring proceedings, thereby rendering unchecked and complete weightage to party autonomy.
- Conflict with Model Law and Principle of Modified Universalism-The rule conflicts with modified universalism and the UNCITRAL Model Law by necessitating parallel English proceedings to discharge English debts, thereby creating tension with other insolvency regimes of other jurisdictions.
As Section 235 of the Inslovency Bankruptcy Code (Code) empowers the adjudicating authority (NCLT) to issue a letter of request to courts in other countries where the assets of the debtor are situated and such assets possess a connection with the aforesaid proceedings provided that reciprocal arrangements have been dealt with the country under Section 234. of the IBC India is in a desire need to oppose this Rule and should enter into a scheme of arrangement or any bilateral agreement as the court of U.K government deems fit as relying on.
HOW GIBBS RULE WILL IMPACT INDIA
The prevalent Insolvency Regime in India under the Code of 2016 have two provisions to assist / provide a guiding roadmap for Cross Border Insolvency. While Section 234 of the Code empowers the Central Government to enter into bilateral agreements with foreign jurisdiction, Section 235 of the Code empowers the Adjudicating Authority to issue letters of request on Courts of the country wherein the bilateral agreements under Section 234 have been entered into. Interesting the Code of Civil Procedure already provides for a mechanism for the recognition and enforcement of foreign judgments. On these lines, for the first time, in the case of Stanbic Bank Ghana, the Hon'ble NCLAT and thereafter the Hon'ble Supreme Court affirmed the decision of the Adjudicating Authority i.e., NCLT wherein the Tribunal albiet observing the limitation to enforce foreign decree, took cognizance of the foreign decree and admitted the Section 7 Petition against the Guarantor i.e. Rajkumar Impex Private Limited, which stood as the guarantor of the principal borrower from Stanbic Bank Ghana.
The adoption of an effective Cross Border Insolvency Law is vital today, without an iota of doubt. Not only will it provide a legal certainty, but will improve the health of trading entities with cross-border operations, ultimately resulting in beneficial cross-border investments, facilitating international trade.
What thus far is the position in India for cross-border insolvency, is that an order of a foreign court can be used to trigger the provisions of the Code in cases of a financial debt and can be considered as an evidence of "default" under the Code. However, the ambiguity whether NCLT is the right forum looms large, especially in light of the gaping absence in clarity whether the recognition of a foreign judgment is automatic or has to satisfy the contours of the Code of Civil Procedure.
In India, the IBC regime has an institutional design spearheaded by the commercial wisdom of the Committee of Creditors, leaving minimal room for judicial intervention. That NCLT as well as the appellate authority, are both limited jurisdiction enjoying tribunals and are not courts of equity, further bound by the contours of the Code. The concept of "comity of courts" or "inherent common law" jurisdiction cannot extend to the Tribunals, within the boundaries of the Code and as such reference has to be made to a Commercial Court in India to recognize and assist the foreign insolvency proceeding.
However in light of Part Z of the IBC (draft pending), there now arises a legal conundrum- while Part Z allows for additional assistance under other laws, limits the powers of NCLT to grant such reliefs as the NCLT within the contours of the Code does not enjoy inherent powers under common law and thus the powers of NCLT are circumscribed by the Code.
Further amidst this conundrum, if Gibbs Rule is analysed correctly, it would not be averse to suggest that India would face a problem in cross-border insolvency when the COMI would not be in India coupled with the possibility of the issue if a creditor would not submit to the proceedings of India and running a parallel proceedings due to Gibbs Rule would not be feasible and can cause various implications.
CONCLUSION
It is trite that in common law jurisdictions the concept of inherent power of common law courts for recognition and assistance in respect of cross-border insolvency proceedings is paramount. Given the lacunae thereof within the framework of the Code, it is prudent that the option of commercial courts's assistance be explored, which would otherwise be restricted if Gibbs' Rule is implemented or followed in India, coupled further with the lacunae of governing Cross Border Framework within the Code.
Originally published 04 October 2024
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