Bakhshiyeva v Sberbank [2018] EWHC 59 (Ch): CBIR 2006, recognition orders and the “rule” in Anthony Gibbs

Judgment on BAILII at: http://www.bailii.org/ew/cases/EWHC/Ch/2018/59.html

OJSC International Bank of Azerbaijan (“IBA“) is the largest commercial bank in Azerbaijan. It fell into financial difficulties and entered into a restructuring proceeding under Azeri law. The Applicant was appointed as IBA’s foreign representative and successfully applied to the English court for an order, pursuant to the Cross-Border Insolvency Regulations 2006 (“CBIR 2006”), recognising the Azeri restructuring as a foreign main proceeding.

The effect of a CBIR 2006 recognition order is to impose a wide-ranging moratorium preventing creditors from commencing or continuing any action against IBA or its property without the permission of the court.

IBA and its creditors agreed a wide-ranging restructuring plan as part of the Azeri restructuring process, which was to have the effect of discharging IBA’s existing liabilities (in return for the creditors acquiring a suite of new economic rights against IBA).

However, the Respondents were creditors of IBA pursuant to contracts governed by English law. According to the “rule” in Anthony Gibbs (1890) LR 25 QBD 399, a debt governed by English law cannot be discharged by a foreign insolvency proceeding. In other words, so far as the English court was concerned, the debts owed to the Respondents (arising out of contracts governed by English law) continued to subsist and the Respondents could obtain judgment and enforce against assets in this jurisdiction (once the CBIR 2006 moratorium had come to an end).

The rule has been subject to sustained academic criticism for being (essentially) anachronistic and Anglo-centric. Thus, the Applicant proposed a “procedural solution” to (what was said to be) the problem posed by the rule in Anthony Gibbs.

The Applicant applied for an order that the moratorium imposed by the CBIR 2006 be extended indefinitely. It was said that this was a power the court possessed under the CBIR 2006. It was argued that such an order would mean that: (i) the rule in Anthony Gibbs would be formally adhered to (as there would be no discharge of the debt); but (ii) the application of the rule would be much circumscribed as a permanent moratorium would act as a procedural bar preventing the Respondents from enforcing their claims. The Applicant argued that such an order would be appropriate in light of the principle of “modified universalism” (i.e. the idea that in relation to corporate insolvency the English court should strive to administer the estate of an insolvent company in the spirit of international comity).

Hildyard J held as follows.

Although the Applicant might claim that the relief sought (i.e. a permanent moratorium) was purely procedural, it was not. In practical terms, such an order would effectively discharge the Respondent’s substantive rights under the English law contracts. The provisions of the CBIR 2006 do not allow the English court to vary or discharge such substantive rights (particularly given the well-established rule in Anthony Gibbs). As a result, the court had no jurisdiction (in the strict sense) to make the order sought: at [146] and [147].

In any event, if the court did have jurisdiction in the strict sense, the Judge would not exercise his jurisdiction to make the order sought. That was for five reasons: at [158].

First, the rule in Anthony Gibbs was binding on the court and it was not appropriate to permit its practical abrogation by procedural means.

Second, any substantive alteration of English contractual rights ought to be sanctioned by some substantive provision of English law (common law or statute) not by procedural side-stepping.

Third, although the Judge understood the criticisms of the rule in relation to the collection and distribution of assets (i.e. liquidation), it was not clear that the criticism of the rule had such force in relation to corporate restructuring (as in this case), which involved the variation or substitution of contractual rights. Where such contractual rights were governed by English law, it was not clear that the principle of modified universalism had the same application.

Fourth, in the context of a restructuring rather than an insolvency, the Judge would be hesitant to to remove or vary individual rights for the greater good and in the name of universalism.

Fifth, IBA could have sought to promote a parallel scheme of arrangement in England which would, if approved by creditors and sanctioned, have overcome the rule in Anthony Gibbs (which, in fact, has become the usual course).

This entry was posted in Foreign insolvency. Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s