English Court of Appeal Previews Cross-Border Insolvency Gibbs Rule Fight

English Court of Appeal Previews Cross-Border Insolvency Gibbs Rule Fight
Jan 08, 2019

English Court of Appeal Previews Cross-Border Insolvency Gibbs Rule Fight

On the road to confirming a cross-border debt restructuring plan, the Gibbs rule remains a nasty pothole requiring careful navigation to avoid significant damage. All the while, the motorists exclaim, sometimes angrily and sometimes wistfully, 'Why don’t they just fix this?!'. In the recent Bakhshiyeva v Sberbank of Russia case,1 the English Court of Appeal didn't have to decide whether the pothole needs resurfacing but did give a preview of the fight over the future of the Gibbs rule that looks to be headed to the UK Supreme Court.

Attention to the Gibbs rule has increased in recent years, and some of the leading academic commentators and practitioners in cross-border insolvency law have criticized it. In this article, we look at what the Court of Appeal made of those criticisms in Bakhshiyeva and some of the issues that the Supreme Court may grapple with on an appeal if the Gibbs rule is challenged directly.

The Gibbs Rule: Victorian Law Meets Modern Insolvency

Named after the 19th century English Court of Appeal decisio Antony Gibbs & Sons v La Société Industrielle et Commerciale des Métaux,2 the Gibbs rule is a private international law rule stating that only the proper law of a contract can discharge or modify the liabilities under the contract.3 Illustrating the rule in Gibbs itself, the English court permitted the plaintiff to sue the defendant on an English contract, notwithstanding that the defendant had been subject to a French liquidation that, under French law, discharged the contractual liability. English courts have repeatedly reaffirmed the rule, including the Supreme Court just this past year in Goldman Sachs International v Novo Banco SA.4 Other jurisdictions influenced by English law also follow the rule, including Canada and Hong Kong. Although there does not appear to be any references to Gibbs in the reported cases, it is generally agreed by practitioners that the rule would be applicable in the Cayman Islands.

In the international insolvency context, the impact of the rule is that a court in a Gibbs jurisdiction will only recognize the discharge, compromise or modification of a contractual debt in a foreign proceeding where the foreign proceeding was governed by the proper law of the contract or the creditor submitted to the foreign jurisdiction. Where creditors holding foreign law governed debt refuse to submit to or participate in the main restructuring proceeding, debtors can therefore be forced to incur the expense of parallel proceedings in different jurisdictions or run the risk of those creditors performing an end run around the restructuring efforts in jurisdictions where courts will not recognize the discharge.

The Court of Appeal's Judgment in Bakhshiyeva

In Bakhshiyeva, the foreign representative of OJSC International Bank of Azerbaijan sought a permanent stay against certain creditors of the bank holding debt governed by English law.

The bank was subject to an insolvent restructuring proceeding under Azeri law that compromised all the bank's debts, including those governed by non-Azeri law. Certain creditors holding English law debt refused to participate in or submit to the Azeri proceeding and relied on the Gibbs rule for the position that they were entitled to pursue their claims in England against the bank without regard to the Azeri restructuring. The foreign representative hoped to restrain the creditors by having the English court grant relief under the Cross-Border Insolvency Regulations 2006.5

The continued correctness or scope of the Gibbs rule was not at issue before the Court of Appeal. The parties agreed that the Court was bound by the rule, although the foreign representative reserved her right to challenge it at the Supreme Court if necessary.6 The case actually turned on the English court's statutory powers: could it grant an indefinite stay of proceedings under the Cross-Border Insolvency Regulations that would both effectively deprive the creditors of their English law rights and continue to have effect even when the foreign proceeding terminated? On this issue, the Court concluded that the procedural nature and intent of the relief permitted under the Regulations precluded using the power to permanently disable substantive rights, and that in any event procedural relief to support the foreign proceeding could not subsist after the foreign proceeding served its purpose.7

However, the Court of Appeal did briefly address the controversy over the Gibbs rule, characterizing the criticisms as being "on the basis that it is an outdated relic from an era when international cooperation in insolvency matters was in its infancy, and a parochial outlook tended to prevail".8 It took issue with the commonly-made charge of parochialism, noting that the Gibbs rule does not reflect a preference for English law, but one for the contract’s proper law, whatever that may be. Perhaps attempting to frame the potential debate at the Supreme Court, the Court identified two "real criticisms" of the Gibbs rule:9

  • That the rule is inconsistent with the principle of modified universalism. The Court suggested in particular that "there may now be a strong case for saying that, in the absence of a stipulation to the contrary, contracting parties should generally be taken to envisage that, upon the supervening insolvency of one party, a single law closely associated with that party should govern the rights of its creditors, wherever in the world its assets happen to be situated, and regardless of the proper law of the contract".
  • That the rule sits "rather uneasily" with the English courts’ own exercise of jurisdiction to grant discharges of debts governed by foreign law and expectation that foreign courts will recognize and enforce such judgments. The Court, however, thought it "only fair to add" that this kind of objection "was decisively rejected" by Lord Collins, writing for the majority of the Supreme Court, in Rubin v Eurofinance SA.10

To the Supreme Court: What Comes Next?

Following the release of the Court of Appeal's judgment, the foreign representative confirmed that she intends to appeal the decision to the Supreme Court.11 In light of her reservation of rights and the Court of Appeal's preview of the issues, the stage could well be set for the Supreme Court to weigh in on the continued applicability of the Gibbs rule to modern cross-border insolvent restructurings. Between its own precedents, the Court of Appeal’s table-setting, academic commentary, international jurisprudence and extra-judicial forces, there are various interesting factors likely to be considered by the Court on a direct challenge to the Gibbs rule:

  • Although modified universalism is recognized as part of the common law, the Supreme Court and the Privy Council have trimmed the principle back from its Cambridge Gas-era reach. In Singularis Holdings Limited v PricewaterhouseCoopers,12 the Privy Council confirmed that the principle is always subject to local law and public policy and that "the court can only ever act within the limits of its own statutory and common law powers".13 There is a danger in viewing the principle as a prescriptive source of power, rights and remedies. As Justice Segal of the Grand Court of the Cayman Islands colourfully put it in In re China Agrotech,14 there can be "an unhelpful tendency in the writings of some commentators to mischaracterize the status and effect of this guiding and flexible principle by elevating it into a rigid rule of law that independently generates rights and remedies and is to be treated, and applied, as if it were a doctrine in metaphysics or theology".15 Is the Gibbs rule truly inconsistent with modified universalism, or is it simply another limitation on the English court's power to assist foreign insolvency proceedings that must be respected?
  • As the Court of Appeal noted, the Supreme Court in Rubin rejected an argument that English courts should recognize and enforce foreign insolvency orders in circumstances where the English court would expect recognition and enforcement abroad of its own orders. For the majority, Lord Collins wrote: "There is no basis for this line of reasoning. There is no necessary connection between the exercise of jurisdiction by the English court and its recognition of the jurisdiction of foreign courts, or its expectations of the recognition of its judgments abroad."16 Unless the Court is willing to revisit this line of thinking and its implications for other areas of private international law, a challenge to the Gibbs rule based on the English court's willingness to discharge foreign debts seems unlikely to be successful.
  • The Rubin court also warned about judges radically remaking the common law of cross-border insolvency. In particular, Lord Collins dismissed as "wholly unrealistic" the suggestion made by one of the losing parties that "a person who sells goods to a foreign company accepts the risk of the insolvency legislation of the place of incorporation". That suggestion is strikingly similar to what the Court of Appeal noted in Bakhshiyeva as a possible argument against the Gibbs rule. Overturning more than a century of common law in this area may be viewed as too radical by some members of the Court.
  • What role may the new UNICTRAL Model Law on Recognition and Enforcement of Insolvency-Related Judgments play in the discussion? The latest product of international collaboration on cross-border insolvency matters would arguably overrule the Gibbs rule if enacted and could be held up as an argument that international legislative efforts are the appropriate forum to advance universalism rather than judicial rule-making.
  • In a similar vein, would the impending departure of the UK from the European Union impact the Supreme Court's decision-making? At a time when there remains significant uncertainty about how the UK's statutory cross-border insolvency regimes will function after 29 March 2019, would the Court be more likely to defer to Parliament for any substantive legal changes in this area?
  • Alternatively, will the Supreme Court see the logic in the international academic and judicial criticisms that have been levelled at the Gibbs rule? In its recent In re Agrokor d.d.17 decision, the US Bankruptcy Court for the Southern District of New York discussed the Gibbs rule and found it lacking. In particular, the US judge agreed with criticisms that Gibbs mischaracterizes the discharge of debt in international insolvency cases as a contractual issue rather than a bankruptcy or insolvency law issue. There is force in that argument: the very nature of a collective insolvency or restructuring proceeding is that the pre-proceeding contractual rights of the parties will be modified, sometimes non-consensually. In that light, why should the parties' pre-proceeding expectations on one element – the governing law – be accorded determinative weight?
  • Without fully abandoning the characterization of insolvency discharge as a contractual matter, the Supreme Court could adopt, like the High Court of Singapore in In re Pacific Andes Resources Development Limited,18 the suggestion of Professor Ian Fletcher to attribute to contracting parties a reasonable expectation of the possibility of insolvency proceedings in a jurisdiction with which one of the parties has an established connection, even if the proper law of the contract is another jurisdiction.
  • Although the Gibbs rule has had legs for well over a century, non-statutory recognition of the effect of foreign discharges is not unknown in other jurisdictions. Indeed, it is the longstanding US approach, as noted by the US Bankruptcy Court in Agrokor.19 Charges of radicalism may be mitigated by relying on the established law of other jurisdictions.

Despite attractive appeals to modified universalism and international comity, the more recent decisions of the Supreme Court and the Privy Council do not evidence an eagerness to rewrite the common law as if cross-border insolvency deserves sui generis treatment. On the other hand, the criticisms of the Gibbs rule articulated by academics, commentators and international courts have some force and have reshaped the conversation around the issue. Given the stakes involved and the influence that the Supreme Court's judgments hold in the Commonwealth offshore jurisdictions, the appeal from Bakhshiyeva will surely be closely watched and highly anticipated.

Mark A. Russell is the Head of Insolvency & Restructuring at KSG Attorneys.

1 [2018] EWCA Civ 2802.
2 (1890) 25 QBD 399.
3 As a part of English private international law, the rule is concerned with what foreign acts the domestic court will recognize. Accordingly, it does not generally effect the scope of the domestic court’s own jurisdiction or power to grant discharges or modifications to contractual debts governed by foreign law.
4 [2018] UKSC 34 at para 12 per Lord Sumption: "… the discharge or modification of a contractual liability is treated in English law as being governed only by its proper law, so that measures taken under another law, such as that of a contracting party’s domicile, are normally disregarded"
5 The Regulations represent the implementation of the UNICTRAL Model Law on Cross-Border Insolvency in the domestic law of Great Britain..
6 Bakhshiyeva at paras 23 and 29.
7 Bakhshiyeva at paras 95 and 98 to 101.
8 Bakhshiyeva at para 29.
9 Bakhshiyeva at para 31.
10 [2012] UKSC 46 at 126.
11 International Bank of Azerbaijan to appeal UK court ruling, Reuters (21 December 2018).
12 [2014] UKPC 36.
13 Singularis at para 19.
14 2017 (2) CILR 526.
15 China Agrotech at para 26(b).
16 Rubin at para 126.
17 18-12104 (Bankr SDNY, 2 October 2018).
18 [2016] SGHC 210 at para 48.
19 Agrokor at footnote 15, citing Canada Southern Ry v Gebhard, 109 US 527 (1883).