No side-stepping the rule in Gibbs

Insolvency Bitesize - March 2019

The Court of Appeal has held unanimously that it would not side-step the long-standing rule in Gibbs - that foreign restructuring plans cannot discharge English law debt - by ordering an indefinite stay under the Cross Border Insolvency Regulations 2006 which would have prevented creditors enforcing their English law rights against a foreign debtor, likely setting the scene for a Supreme Court hearing next year.

The Court of Appeal in Re OJSC International Bank of Azerbaijan [2018] EWCA Civ 2802 refused to prevent creditors under English law debt arrangements from enforcing their rights against an Azeri bank that had successfully put forward an Azeri restructuring plan discharging its debts, approved by the requisite majority of creditors and sanctioned by the Azeri court.

The Court of Appeal held unanimously that it was neither necessary nor appropriate to grant an indefinite stay under the Cross-Border Insolvency Regulations 2006 (the "CBIR") – extending beyond the expiry of the Azeri proceedings – where the effect would be to prevent, in substance, the English law creditors from enforcing their rights. That would go against the long-standing rule in Gibbs.

The rule in Gibbs is, in essence, that the proper law of a debt governs how it may be extinguished and, accordingly, that English law debt may only be discharged under English law. Foreign law schemes or plans will not, therefore, extinguish English law debt (although the EU Insolvency Regulation provides a notable exception to this rule – at least while the UK remains a member state). The question in this case was whether the grant of an indefinite stay under Article 21(1)(a) or (b) of the CBIR could be used to side-step Gibbs. The Court of Appeal was clear that it could not.

Article 21(1)(a) and (b) give the court, where it has recognised a foreign insolvency proceeding, a discretionary power to grant relief in the form of a stay of proceedings or execution against the debtor's assets. But before exercising such power, the court must be satisfied that to do so is necessary to protect the interests of creditors and is an appropriate way of achieving that protection. The Court of Appeal held that:

  • an indefinite stay was not necessary - the success of the plan would be unaffected by the claims of the English law creditors. Other creditors of the Azeri bank needed no further protection (having received their entitlements) and there was no evidence to suggest that what they had received under the plan had been discounted to reflect the probable non-participation of the English law creditors; and
  • an indefinite stay was not, and would seldom ever be, appropriate - significantly, the Azeri bank could have carried out a parallel English law scheme of arrangement to deal with the English law debt but chose not to do so, most likely because it would have had to offer the English law creditors something in return given they would have formed a separate class. The English law rights of the creditors were their strongest bargaining position, being protected by the Gibbs rule. The Court of Appeal considered that it could seldom ever be appropriate to grant relief under the CBIR the substantive effect of which would be to override those rights.

Crucial to the court's analysis was that the CBIR were largely procedural in nature (a point supported by the Supreme Court in Rubin) – particularly Article 21 whose main purpose was to provide a temporary breathing space. 

The Court of Appeal also made clear that relief under the CBIR could not extend beyond the date of termination of the relevant foreign insolvency proceeding – there would be no foreign representative to apply for assistance or a proceeding for which assistance could be sought. Any relief previously granted would have to terminate on expiry of the foreign proceeding.

While UNCITRAL has recently approved and adopted the text of a new Model Law on the Recognition and Enforcement of Insolvency-Related Judgments, the UK is unlikely to unilaterally implement it in a no-deal Brexit scenario. So, if appealed to the Supreme Court, whether Gibbs survives will be highly significant in the event of the UK’s departure from the EU (e.g. where an EU27 restructuring plan purports to deal with English law debt post Brexit).