In October 2018 Judge Glenn of the United States Bankruptcy Court (New York) considered the common law principles of comity and the English common law Gibbs rule to grant recognition of a Croatian company's settlement agreement which modified both New York and English law.
In April 2017 following a total indebtedness of HRK 31.5 billion, including unsecured English law-governed debt amounting to EUR 1.66 billion, and New York law governed debt amounting to EUR 625 million, Croatian company Agrokor DD ("Agrokor") commenced extraordinary administration proceedings under Croatian law, a process available for systematically important business entities ("the Croatian Proceedings"). In Croatia, extraordinary administration proceedings provide for the negotiation, acceptance by creditors, and approval by a Croatian court, of a settlement agreement which adjusts the debt and ownership interests of distressed companies.
The settlement agreement contemplated the restructuring of Agrokor’s financial debt, a significant portion of which was governed by English law and the laws of the United States. Although the Croatian Proceedings had been recognised by both the English and United States courts, the settlement agreement required separate recognition. (To read articles on the previous proceedings please read here and here). Instead, each court could exercise their further discretion to approve or reject the settlement agreement largely depending on principles of comity.
The New York Bankruptcy Court considered that, in contrast to the “relatively straightforward” issues around recognition of the Croatian Proceedings, recognising and enforcing the settlement agreement within the jurisdiction of the United States, “presented challenging issues with very practical consequences.”
When analysing whether to recognise and enforce the settlement agreement as approved by the Croatian court, the Bankruptcy Court first considered common law principles of comity deciding that it "ultimately boils down to a question of the appropriateness of granting comity to the foreign court approval of the settlement agreement".
When determining the appropriateness of the plan of reorganisation the Court considered whether;
- Creditors had had a full and fair opportunity to be heard consistent with fair process;
- The Plan had been approved by the creditors and the foreign court; and
- This case was consistent with cases where the denial of comity was appropriate.
When reviewing the Croatian settlement agreement with the principles above, the court considered;
- The standards for due process were met and creditors could be better off than in liquidation;
- The substance and procedures of the settlement agreement broadly recognised principles of U.S insolvency laws;
- The creditor distributions approved in the settlement agreements closely followed the waterfall provisions of the U.S Bankruptcy Code;
- Two thirds of the creditors had voted to approve the settlement agreement.
It was for this reason that the court concluded that all evidence demonstrated that the creditor's received due process and would be better off under the settlement agreement than they would be in liquidation.
The Bankruptcy court considered the "Gibbs rule", the English common law principle that a debt governed by English law cannot be discharged or compromised by a foreign insolvency proceeding. The rule derived from the Court of Appeal decision in Antony Gibbs and sons v La Société Industrielle et Commerciale des Métaux (1890) has been heavily criticised as no longer relevant in modern day cross-border insolvency proceedings.
The Bankruptcy Court observed the "Gibbs rule" could result in debts governed by English law not being bound by the settlement agreement. The Bankruptcy Court considered the settlement agreement was appropriate on the facts and should be recognised and enforced against the creditors that were located in the United States.