Out-Law Legal Update 3 min. read
17 Jan 2019, 10:33 am
This decision, which upheld an earlier High Court ruling, confirms that creditors whose debts are governed by English law have greater rights in foreign insolvency proceedings than creditors from many other jurisdictions. When foreign companies are entering into restructuring proceedings outside of the EU they will need to think about this extra protection and undergo a separate English process, such as scheme of arrangement, to compromise English debts.
The International Bank of Azerbaijan (IBA) entered into a restructuring plan under Azeri law. Under Azeri law that plan was binding on all creditors including those who did not vote and those who voted against the plan. The 'foreign representative' of IBA Gunel Bakhshiyeva successfully applied to the High Court in England for recognition of the Azeri restructuring as main proceedings under the Cross Border Insolvency Regulations 2006 (CBIR) which implement the UNCITRAL Model Law on Cross-Border Insolvency into UK law. She then unsuccessfully applied for an indefinite moratorium in relation to all debts listed in the restructuring plan - including those governed by English law. Bakhshiyeva appealed the High Court's decision.
The question the Court of Appeal had to decide was whether the English court had the power on the application of a foreign representative under the CBIR to direct that the claims of English creditors be stayed indefinitely, even after the foreign restructuring has come to an end. It also had to decide if it should exercise that power.
The English case of Antony Gibbs and sons v La Société Industrielle et Commerciale des Métaux (1890) 25 QBD 399, says that a debt may only be discharged by its own governing law. The Gibbs rule has been criticised by commentators and academics with the judge noting that the rule may be thought of as "increasingly anachronistic in a world where the principle of modified universalism has been the inspiration for much cross-border cooperation in insolvency" and further commenting that it is thought to "sit uneasily" with principles of English law that expect foreign courts to recognise English insolvency judgments.
It has been subject to debate for some time how the rule in Gibbs would be affected by the CBIR; in this case if the court had granted an indefinite stay under the CBIR this would effectively bypass the rule in Gibbs as the Azeri proceeding would extinguish the English debts.
In making its decision, the Court of Appeal concluded that it did not have jurisdiction, in the sense that it was settled practice that the court should not exercise its power, to order an indefinite stay. It stated that it was important to look at whether the stay was necessary to protect the interests of the IBA creditors and whether the stay was an appropriate means of achieving that protection. The court concluded that neither condition was satisfied as the stay was not necessary to protect IBA's creditors given that they had already received everything which they were entitled to through the Azeri restructuring process which had since come to an end. As the court concluded that it did not have jurisdiction, it did not need to decide whether it should exercise its power.
In relation to the Gibbs rule, the Court of Appeal, whilst recognising the criticisms levied against the rule, agreed with the judge at the first hearing that "the Model Law and the CBIR do not empower the English court, in purported appliance of English law, to vary or discharge substantive rights conferred under English law by the expedient of procedural relief which as a practical matter has the same effect, and has been fashioned with the intention, of conforming the rights of English creditors with the rights which they would have under the relevant foreign law".
However the Court of Appeal did say, in contrast to the High Court, that there is no absolute bar to a variation of English law right under Model Law, but that there could be limited circumstances where it might be appropriate.
The Court of Appeal also considered whether it was right for the stay of proceedings to be extended beyond the end of the restructuring of IBA. The Court said that it would be inconsistent with the Model Law approach to extend the stay beyond the restructuring, as the stay is designed to give "breathing space" to companies in financial difficulty . The fact that the Azeri law had been modified so that the restructure would be ongoing, even though IBA was now trading normally, did not change the court's view. It said that that the plan was being "kept artificially alive, but as an insolvency proceeding it had served its purpose and run its course".
The Court of Appeal has refused Bakhshiyeva permission to appeal to the Supreme Court. It is thought that she may now apply directly to the Supreme Court to appeal the decision.
Tom Storer is a restructuring expert at Pinsent Masons, the law firm behind Out-Law.com