The High Court held that a moratorium in relation to restructuring proceedings in Azerbaijan could not be extended in breach of the Gibbs rule, allowing two significant creditors to proceed with their claims in the English Courts.
This case concerned the OJSC International Bank of Azerbaijan (“IBA”), the largest commercial bank in Azerbaijan. IBA had fallen into financial difficulties and proposed a $3.3 billion restructure in Azerbaijan to restructure its debts. The plan was approved by 93.9% of creditors, however the Respondents, Sberbank and Franklin Templeton, did not vote for the plan and argued that it could not bind them.
Sberbank was the sole lender under a US$20m term facility agreement and Franklin Templeton were the beneficial owners through Citibank as trustee of US$500m Notes. Both the Sberbank Facility and the Notes expressly state that they are governed by English law.
In June 2017 the Applicant, IBA's Foreign Representative, obtained a Recognition Order in the UK recognising the Azeri Restructuring Proceedings as foreign main proceedings under the Cross-Border Insolvency Regulations 2006 ("CBIR"). The Recognition Order imposed a wide-ranging moratorium, preventing creditors from commencing or continuing any action against IBA or its property without permission from the Court. The moratorium was binding on all creditors whether or not they voted for the plan.
The Restructuring Proceedings were due to terminate on 30 January 2018 and under Azeri law could not be extended and as such the moratorium would lapse. The Foreign Representative applied to continue the moratorium. Sberbank and Franklin Templeton opposed the extension of the moratorium.
The Court had to consider if it had the power to grant a permanent moratorium or stay to prevent a creditor exercising its rights under a contract governed by English law in order to prevent that creditor enforcing its rights contrary to the terms of the foreign insolvency proceeding by which all creditors were, under the relevant foreign law, intended to be bound. If so, they would then have to determine whether in its discretion the Court should exercise that power. In particular could they extend the moratorium beyond the date on which the foreign proceedings will terminate.
Sberbank and Franklin Templeton relied on the rule in Gibbs. The Gibbs rule, established in Antony Gibbs & Sons v La Societe Industrielle et Commerciale des Mataux (1890) 25 QBD 399, is the most frequently cited authority that a debt governed by English law cannot be discharged or compromised by a foreign insolvency proceeding. There is an exception, if the relevant creditor submits to the foreign insolvency proceeding. The creditor will be taken to have therefore accepted that the law governing that foreign insolvency proceeding should determine their claim.
Gibbs was considered in contention with the principle of "modified universalism" in the context of a foreign insolvency proceeding recognised in the UK. The Court confirmed that the long established principle in Gibbs remains good law notwithstanding the implementation of the CBIR.
Although the Gibbs rule has been criticised, it would fall to a higher court to determine if it should be reviewed.
The Court therefore refused to extend the moratorium, allowing Sberbank and Franklin Templeton to proceed with their claims through the English Courts.
The decision is now being referred to the Court of Appeal. However after the judgment had been circulated, the Foreign Representative filed a Witness Statement confirming that the Azerbaijan Parliament has approved an amendment to the Law on Banks which would allow the Azeri Court to order further extensions of the Restructuring Proceedings, with no limit on the number of extensions. We await developments.