It is not uncommon to see that the law governing a loan document is different from that of the debtor company’s place of incorporation. Can the rights of the lender be altered by a restructuring plan sanctioned in the latter? The English court said “no” in a recent case1, applying the longstanding Gibbs rule that also applies under Hong Kong law.
The case concerned the restructuring of OJSC International Bank of Azerbaijan (“IBA”), which is registered in Azerbaijan and largely owned by the Azerbaijan Government. IBA has been placed into a restructuring proceeding (“Restructuring Proceeding”) under Azeri law and the English court had earlier granted an order recognising the Restructuring Proceeding as a foreign main proceeding (“Recognition Order”) under the U.K.’s Cross Border Insolvency Regulations 20062 and imposing a moratorium akin to that under an English administration proceeding.
The restructuring plan proposed by IBA was approved by a substantial majority at the creditors’ meeting and sanctioned by the Azeri Court, meaning as a matter of Azeri law it binds all the dissenting creditors, including the Respondents in the case, whose lending to IBA is governed by English law and who did not participate in the Restructuring Proceeding.
In the current case, IBA’s Foreign Representative sought an order to extend the moratorium in the Recognition Order and that the moratorium should not be lifted by the English court to allow the Respondents to enforce their creditor rights in England.
The Respondents opposed the extension of the moratorium on the basis of the rule in Antony Gibbs & Sons v. La Société Industrielle et Commerciale des Métaux3 (the “Gibbs rule”).
The Gibbs rule broadly provides that a debt governed by English law cannot be discharged or compromised by a foreign insolvency proceeding.
The English court did not extend the moratorium and further declined to allow procedural relief to vary or discharge substantive rights under English law (such as using a permanent stay as a way of avoiding the Gibbs rule).
Reasoning of the court
The exception to the Gibbs rule—broadly where a creditor submits to a foreign insolvency proceeding (for example, by submitting a proof of debt in a liquidation)—did not apply given the Respondents’ stance.
The court accepted that in practice the Gibbs rule may have a limited scope in the context of a foreign liquidation, when for example approved events such as the remittance of assets from England to a foreign liquidation deny the rule’s practical efficacy notwithstanding its continued application (since in that case creditors are unable to execute against debtor assets in England).
However, the court refused the moratorium extension because the application sought an order intended to bar forever the Respondents from exercising their rights under English law. In the court’s opinion, such restriction of rights is not merely a “procedural” matter and the Respondents’ rights under English law should not be negated and substituted by a foreign law right.
However, the court acknowledged that the Gibbs rule can be overcome by implementing a parallel scheme of arrangement in England, as has become the expected process in similar circumstances.
The Gibbs rule applies in Hong Kong. From the English IBA case (which would likely be persuasive, although not binding in Hong Kong), a Hong Kong creditor can infer it remains the case that:
a) a debt governed by Hong Kong law cannot be discharged or compromised by a foreign insolvency proceeding unless, broadly, the relevant creditor submits to the foreign insolvency proceeding;
b) Hong Kong creditors’ rights under Hong Kong law governed debt can only be compromised in a Hong Kong law governed process. The use of a parallel scheme of arrangement in Hong Kong—although adding to the cost of the restructuring process—alongside the foreign proceeding would likely overcome the concern of “outlier” creditors, if creditors vote in both procedures and similar cram down provisions are available.
In contrast, a few days after the English decision was made, the U.S. court approved IBA’s restructuring plan and ordered that all creditors are “permanently enjoined” from commencing or continuing any action in the U.S. to exercise their creditors’ rights and barred from commencing actions to settle disputes arising out of the plan in the U.S.4
Accordingly, a restructuring plan approved and sanctioned in other jurisdictions may be recognised by the U.S. court and become binding on all creditors in the U.S. In these circumstances, a creditor may not be able to take action to enforce its rights in the U.S.