Following our previous article, the Court of Appeal dismissed an appeal following the High Court deciding 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 implemented a restructuring plan in Azerbaijan in relation to debts worth $3.3 billion. The plan was approved by 93.9% of creditors, however Sberbank and Franklin Templeton, did not vote on 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 of US$500m Notes. Both the Sberbank Facility and the Notes expressly state that they are governed by English law.
In June 2017 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.
At the time of the High Court’s decision, the Restructuring Proceedings were due to terminate on 30 January 2018 and under Azeri law could not be extended. As such the moratorium would lapse. The Foreign Representative applied to continue the moratorium which Sberbank and Franklin Templeton opposed. Since the original proceedings, the Azerbaijan Parliament 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.
The reason the issue arose is as a result of the “Gibbs Rule” which provides that a debt governed by English law cannot be discharged by a foreign insolvency. As a result Sberbank and Franklin Templeton would be free to enforce their debt over assets in the UK.
The Foreign Representative argued that creditors’ claims should be stayed indefinitely. The restructuring plan in Azerbaijan had achieved its objective, creditors had obtained everything to which they were entitled, and at the time of the Court of Appeal hearing, IBA was trading normally. The Court of Appeal held that the restructuring plan had served its purpose, had run its course and would be “kept alive artificially”.
The Court of Appeal stated that given this was a restructuring process an indefinite stay could only be granted if it was necessary to protect the interests of creditors, and that a stay was an appropriate way of achieving that protection. It was held that neither of those conditions were satisfied as the plan had been completed.
Article 21 of the Model Law was considered in detail. The Court of Appeal held that if the power to grant a stay had been intended to override the substantive rights of creditors, article 21 would have explicitly stated as much.
The Court of Appeal upheld the ‘Gibbs Rule’ given that Sberbank and Franklin Templeton had not submitted to the foreign insolvency proceeding and therefore did not fall within the exception of the rule, where a creditor will be taken to have therefore accepted the law governing that foreign insolvency proceeding should determine their claim.
The Court of Appeal agreed with the High Court that although the Gibbs rule has been criticised, it would fall to the Supreme Court to determine if it should be reviewed.
The Court of Appeal dismissed the appeal, and therefore upheld the High Court’s decision to refuse to extend the moratorium, allowing Sberbank and Franklin Templeton to proceed with their claims through the English Courts.
We await to see if the Foreign Representative will appeal to the Supreme Court which is considered likely. If it does it will provide modern judicial clarification on the “Gibbs Rule”.