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High Court says it cannot permanently stay enforcement of English law debt obligations in favour of a foreign insolvency proceeding

Out-Law Legal Update | 05 Feb 2018 | 11:31 am | 2 min. read

LEGAL UPDATE: The High Court has said that it could not impose a permanent moratorium against creditor action in England and Wales where the foreign restructuring of an Azerbijan bank had been recognised as a foreign main proceeding under the Cross-Border Insolvency Regulations.

The International Bank of Azerbaijan (IBA) had entered into a restructuring proceeding under Azeri law to restructure its debts. In May 2017, Gunel Bakhshiyeva, who had been appointed as IBA's 'foreign representative', successfully applied to the High Court for an order recognising IBA's restructuring proceeding as a foreign main proceeding under the Cross-Border Insolvency Regulations 2006 (CBIR06). In July 2017 a restructuring plan proposed by IBA had been approved by a substantial majority at a meeting of creditors in Azerbaijan. As a matter of Azeri law, the plan was binding on all affected creditors, including those who did not vote and those who voted against the restructuring plan.

Two creditors, Sberbank and Frank Templeton, who had not voted or participated in the creditors' meeting claimed that because their relationship with IBA is governed by English law the restructuring plan did not bind them. The restructuring proceeding was due to terminate on 30 January 2018 and could not be extended under Azeri law. Unless extended, the moratorium afforded by IBA would lapse, so IBA's foreign representative issued the application to continue the moratorium and more specifically sought an order that:

- the moratorium, in relation to debts listed in the restructuring plan, be continued so that no legal process against such debts could be instigated or continued against IBA or its property without permission of the Court; and

- the moratorium should not be lifted so as to permit Sberbank or Frank Templeton to enforce their loans.

Sberbank and Templeton opposed the application, relying on the rule established in the 1890 case of Gibbs & Sons v Société Industrielle et Commerciale des Métaux  that a debt governed by English law cannot be discharged by a foreign insolvency proceeding.  

The court considered that the application raised two short but fundamental points of cross-border insolvency law:

  • whether the court has jurisdiction to extend a moratorium imposed under the CBIR06 without limit as to time and beyond the date on which IBA's foreign restructuring proceeding will terminate; and
  • if the court does have jurisdiction, whether the court should refuse to let the moratorium continue in favour of a creditor whose debt is governed by English law so as to prevent that creditor from achieving a better return than that enjoyed by all of the company's other creditors under a restructuring plan declared in the jurisdiction in which the company is registered and has its centre of main interests.

The judge followed an eight-point plan and specifically focused on the tension between the rule in Gibbs and the objectives of the Model Law on Cross-Border Insolvency adopted by UNCITRAL.

Despite strong arguments relayed on behalf of the foreign representative, the application was dismissed. Even if the judge could have been persuaded that he had jurisdiction to grant relief beyond the point at which the foreign proceedings terminated, having acknowledged that the rule in Gibbs was binding on the court, the judge could not agree a permanent stay of claims as a way around the rule. No case of any precedent or authority had been put before the court to establish that a permanent moratorium could be granted.

The judge said that the points raised were "intriguing and complex" and potentially of "very considerable legal significance". The judge also said that a re-evaluation of the Gibbs case by a higher court may  "materially change the approach" and that the "introduction of a new Model Law involving the recognition and enforcement of insolvency related judgments as has been proposed by UNCITRAL may solve the problem if ever adopted".

Interestingly, following the hearing the judge was provided with a witness statement on behalf the foreign representative of IBA which stated that the Azerbaijan parliament had approved an amendment to Azeri law which would now enable the Azeri courts to order further extensions of IBA's restructuring proceeding. Permission has been granted to appeal to the Court of Appeal.

Louise Taylor is a restructuring expert at Pinsent Masons, the law firm behind Out-Law.com