In a decision widely anticipated by investors in emerging market and distressed debt, the Court of Appeal has upheld the decision of the High Court to refuse to grant an indefinite moratorium on claims under certain English law debts under the Cross Border Insolvency Rules (“CBIR”). In doing so, the Court of Appeal has reaffirmed a long-standing principle of English common law that provides important protection to creditors; known as the Rule in Gibbs, the rule provides that a debt may only be discharged according to its own governing law.
In early 2017 the International Bank of Azerbaijan (“IBA”) fell into financial difficulties and entered a restructuring process under Azeri law. On 24 May 2017 Ms Gunel Bakhshiyeva as foreign representative of IBA applied to the High Court in England for recognition of the Azeri restructuring as a foreign main proceeding under the CBIR, which provides for the recognition of foreign representatives of companies going through an overseas restructuring or liquidation process.
On 6 June 2017 recognition was granted by Mr Justice Barling. The order of Barling J included a moratorium under Article 20 of the CBIR which prevented the bringing of any proceedings against IBA.
Under the restructuring plan put forward by IBA under Azeri law, creditors were offered the right to exchange their claim for other entitlements, mainly debt securities issued by IBA and the government of Azerbaijan. The plan was approved by a large majority of creditors at a meeting on 18 July 2017. On 17 August 2017 the restructuring was approved by the Azeri Courts.
However, certain creditors who held debt governed by English law declined to participate in the restructuring or to submit to the jurisdiction of the Azeri court. Those creditors were: Sberbank of Russia, pursuant to a US$20 million facility agreement and certain funds managed by Franklin Templeton Investment Management* as holders of certain US$500 million 5.625% Notes (Eurobonds) due 2019 issued by IBA.
First Instance Decision
On 15 November 2017 IBA applied under Article 21 of the CBIR to extend the moratorium granted by Barling J until further order of the Court (effectively indefinitely) so that no proceedings could be brought pursuant to the outstanding English law debts. Sberbank and Franklin Templeton both opposed the application. The application was heard on 14 and 15 December 2017.
In opposition to IBA’s application Sberbank and Franklin Templeton relied in particular on the Rule in Gibbs. The Rule in Gibbs is named after the 19th century case of Antony Gibbs and sons v La Société Industrielle et Commerciale des Métaux in which it was established and means that an English law debt cannot be discharged as a result of an insolvency, restructuring or bail-in process conducted under foreign (non-EU) law which may not meet the standards of fairness and transparency expected under English law.
The Rule in Gibbs is an example of one of the protections offered by English law that make it attractive for international financing transactions. Were this rule to be overturned or narrowed this could cause considerable uncertainty for creditors holding English law debt particularly where the debtor is based outside of the EU, as other jurisdictions may not offer the same procedural and substantive safeguards granted by English law.
It has been an open question for some time as to how the Rule in Gibbs is affected by the CBIR which implement in the UK the UNCITRAL model law on cross-border insolvency. This provides for the recognition of foreign representatives of companies going through an overseas restructuring or liquidation process. Although it was accepted by all parties that the Rule in Gibbs is binding on all Courts up to the Supreme Court, counsel for IBA sought to argue that its effect was limited by the CBIR.
At first instance Mr Justice Hildyard refused the application of IBA but granted IBA leave to appeal to the Court of Appeal.
The Court of Appeal Decision
The appeal came before a panel of Lord Justice Lewison, Lord Justice Henderson and Lord Justice Baker in the Court of Appeal on 24 and 25 October 2018.
By a unanimous decision of the panel, with Lord Justice Henderson giving the main judgment, on 18 December 2018 the Court of Appeal dismissed the appeal and upheld the first instance decision of Hildyard J.
First, the Court of Appeal held that the CBIR did not grant the Court the power to amend the substantive rights of the English law creditors. The Court of Appeal concluded that the further moratorium was neither necessary nor appropriate to protect the interests of the creditors of the IBA.
In deciding this the Court of Appeal referred to the Guide to enactment of the UNCITRAL model law which provided that the scope of the model law is “limited to some procedural aspects of cross-border insolvency” and that it “does not attempt a substantive unification of insolvency law” and noted that if Article 21 of the CBIR was intended to permit substantive changes to creditors' rights it would have expected this to have been provided expressly.
In deciding this issue the Court of Appeal also paid attention to the fact that the restructuring in Azerbaijan had concluded some time ago and IBA had resumed trading normally. Therefore there was no suggestion that if the indefinite moratorium was not granted the restructuring would fail or that the other creditors would be prejudiced by the English creditors being permitted to enforce their rights.
The Court of Appeal drew a distinction between the position on a liquidation, where the creditors’ rights are generally unaffected but merely enforced collectively and the position, as in this case, on a restructuring where the rights of the creditors are amended so that the debtor can continue to trade.
The Court of Appeal also noted that in order to restructure its English debts IBA could have promoted a Scheme of Arrangement in the English Courts but had chosen not to do so, presumably the Court of Appeal reasoned because IBA would have needed to offer English law creditors sufficiently appealing terms to secure their approval.
Second, the Court of Appeal held that the CBIR did not allow the Court to grant relief which would continue to have effect after the foreign insolvency proceedings had come to an end which, IBA had accepted, would be the result of their application for an indefinite moratorium had been successful.
The Court noted that the CBIR had been drafted on the assumption that there would always be a foreign representative of the foreign insolvency process to respond to any applications in relation to the insolvency proceedings. If the indefinite moratorium sought by IBA was granted and the Azeri restructuring process concluded there would be no one with standing to respond to any subsequent applications in relation to the moratorium. Counsel for the IBA had argued that the debtor itself could respond to such applications but the Court of Appeal said that while this was true, if the CBIR had been intended to grant such relief it would have included provisions which provided a mechanism for such proceedings to be handled.
The Court of Appeal concluded that it did not make any difference for these purposes that, pursuant to a change of Azeri law specifically for the purposes of these proceedings, the Azeri restructuring process had been extended. The Court of Appeal concluded that the purpose of the Azeri restructuring process had been achieved before it was extended in January 2018 and therefore the restructuring process was being “kept alive artificially.” Accordingly, the extension of the proceedings did not provide justification for continuing the moratorium.
The Court of Appeal refused IBA leave to appeal to the Supreme Court. IBA is now expected to apply directly to the Supreme Court for permission.
This outcome should be widely welcomed by holders of English law governed debt, who will be reassured that they can rely on this specific protection offered by English law when investing internationally, outside the EU. It remains to be seen what impact Brexit may have on the position of EU debtors or whether the Supreme Court will be persuaded by IBA’s arguments that the Rule in Gibbs has outlived its usefulness and has no place in a modern, and far more international, business world.