Under current English law, an English law debt can only be compromised by agreement or by the English courts. This is known as the "rule in Gibbs", after the 1890 Court of Appeal case which established the principle. It means an English court will not recognise the compromise of an English law debt under a foreign insolvency or restructuring procedure in which the creditor has not participated. (If a creditor has participated in the procedure, it may be deemed to have consented to its terms through that participation.) Though long-standing, this approach has proved controversial, raising questions of policy and legal theory. This note explains how two ongoing international restructurings have put the rule in Gibbs back under the spotlight and why creditors of English law debt owed by foreign entities should follow developments closely.

Pros and cons of the rule in Gibbs

The rule in Gibbs is potentially a source of comfort to a creditor of English law debt owed by a foreign entity. But it has been widely criticised as impractical, and inconsistent with:

• the English courts' willingness to compromise or discharge non-English law claims through English schemes and other procedures; and
• the emphasis on cross-border recognition and co-operation in the UNCITRAL Model Law on Insolvency (and, in England, the Cross-Border Insolvency Regulations 2006 (the CBIR)).

New York judgment in Agrokor

The rule in Gibbs also puts the English courts at odds with the approach of courts in many other jurisdictions, as illustrated in the recent New York judgment in Agrokor. In April 2017 the Croatian Agrokor group filed for protection under Croatian law. As part of the Croatian restructuring a settlement agreement was drawn up to restructure the group's debts. Just over two thirds of the debt subject to the Croatian settlement agreement was governed by English law, the remainder being governed by New York law.

In September 2017, the English courts recognised the Croatian restructuring as a foreign main proceeding (under the CBIR). However, the English courts have not yet been asked to recognise, or give effect to, the terms of the Croatian settlement agreement.

At the end of October 2018, the New York courts recognised the Croatian settlement agreement under Chapter 15 of the US Bankruptcy Code. In so doing, the US court ruled that recognition and enforcement of the Croatian settlement agreement was an appropriate exercise of comity and application of US law.

The court quoted Professor Fletcher's comment that "[t]he Gibbs doctrine belongs to an age of Anglocentric reasoning which should be consigned to history". It also observed that "England, of course, is free to continue to adhere to the Gibbs rule, but that does not mean that a U.S. bankruptcy court must follow the rule in deciding whether to recognize and enforce the decision of a court of another jurisdiction."

The case of the International Bank of Azerbaijan

The Azeri restructuring of the International Bank of Azerbaijan (IBA) has been considered by the English courts several times this year. IBA is the largest commercial bank in Azerbaijan and entered a Azeri restructuring process in May 2017 with the aim of restructuring the bank's debts.

In May 2017, the English courts recognised the Azeri restructuring as a foreign main proceeding under the CBIR and granted a temporary moratorium preventing any creditors from bringing actions in the English courts to enforce its debts. IBA's foreign representative then brought an application for an indefinite moratorium in England, the effect of which would be to forever prevent creditors from enforcing their (English law governed) debts.

In rejecting this request, the English court held that it did not have jurisdiction under the CBIR to grant the indefinite moratorium since the CBIR provides a framework for procedural matters only. Further, any such order would be contrary to the rule in Gibbs: the effect of the moratorium would be the same as allowing the discharge of the debt. This decision is under appeal and the Court of Appeal's judgment is awaited.

What next?

It would take a decision of the Supreme Court to overturn the rule in Gibbs. No one can predict what the Supreme Court would rule on such a point. Would it consider the legal theory behind the original decision in Gibbs remains valid, or be persuaded by the policy arguments advanced by its critics? If either of the above cases reaches the Supreme Court, creditors of English law debts held by foreign entities should take particular note.