Commercial and Insolvency Update March 2018 Case Update I

Bakhshiyeva v Sberbank of Russia [2018] EWHC 59 (Ch)

Hildyard J held that the Court had no power to grant a permanent stay or moratorium in support of foreign insolvency proceedings to prevent creditors from exercising their rights under an English contract. The rule in Antony Gibbs & Sons v Societe Industrielle et Commerciale des Metaux (1890) 25 QBD 399, that a debt governed by English law could not be discharged by foreign insolvency proceedings, still applied. To make the order would amount to varying or discharging substantive rights by the expedient of procedural relief. In the context of a foreign insolvency proceeding which has been recognised in the English jurisdiction, the tension with the principle of “modified universalism” was also considered.

An Azeri bank had commenced proceedings in Azerbaijan (where it was registered and had its main interests) to restructure its debts, and sought an order in the High Court to extend a moratorium on enforcement against the bank. A previous order had recognised the Azeri proceedings as a “foreign main proceeding” under the Cross-Border Insolvency Regulations 2006 (“CBIR”), and imposed a moratorium preventing creditors from commencing or continuing action against the bank without the court's permission. The restructuring plan was subsequently approved by creditors and the Azeri courts; under Azeri law, it was binding on all affected creditors. The respondents relied on the “rule” in Antony Gibbs & Sons. They had not contractually submitted to Azeri law, and believed that they had retained the right to enforce their claims subject only to the existing moratorium.

The court was required to determine whether it had the power to grant a permanent stay or moratorium, in so doing preventing the creditors from exercising their rights under an English contract, where enforcement of the contract would be contrary to the terms of foreign insolvency proceedings which were intended to bind all creditors. The court dismissed the bank’s application.

The court considered, firstly, the nature and purpose of the bank's voluntary restructuring under Azeri law. The consequences varied depending on whether the process followed was akin to a liquidation procedure or a rescue/debt reconstruction intended to enable the bank to carry on business. Undisputed expert evidence showed that under Azeri law, the exercise was a “rescue” or “turnaround” process and aimed at the resumption of trading rather than the collection of assets and their distribution followed by dissolution [29].

Secondly, the court considered the Scope of the decision in Antony Gibbs & Sons. The discharge of a debt under foreign insolvency law was only treated as a discharge in England if it was so under the law applicable to the contract [44]. If the relevant creditor submits to the foreign insolvency proceeding, the Antony Gibbs rule does not apply [46]. The proposition had been doubted by commentators who regarded insolvency law and universalism as having an overriding effect, and had been thought to be out of step in the context of foreign insolvency proceedings [48].

The refusal to accept foreign discharge of an English debt was an anomaly where, under English law, an English bankruptcy could discharge a foreign debt, as was held in Rubin v Eurofinance SA [2012] UKSC 46. However, the Antony Gibbs rule had been repeatedly applied at all levels of the English courts. For Hildyard J the question was whether the principles of “modified universalism” as expressed in the common law and in the Model Law on Cross-Border Insolvency adopted by the United Nations Commission on International Trade Law (the "Model Law"), on which the CBIR are based, and the CBIR themselves, enable the court to grant relief calculated to advance those principles without upsetting the Antony Gibbs rule. More particularly, the question was whether the rule may formally be observed by accepting the continuation of the rights which English law confers, and yet the principles of modified universalism given effect by preventing the exercise of those rights by a stay or moratorium [58-59].

The objective of the Model Law was "universalism", providing a single forum applying a single regime to all aspects of a debtor's affairs on a worldwide basis [79]. The Model Law advances that the law of the debtor's centre of main interests (“COMI”) should determine issues in insolvency proceedings [80]. However, the application of the Model Law does not seek to achieve substantive uniformity or reconciliation between different jurisdictions. It is subject to modification according to the jurisdiction in which it had been adopted [83-4]. The common law does not yield to the law of COMI, and the law of the COMI cannot be enforced unless and to the extent that by statute it is absorbed into English law.

The applicants submitted that the court should follow the judgment of Norris J in Re BTA Bank JSC [2012] EWHC 4457 (Ch) ("the BTA case"). In the BTA case, a Kazakh bank’s restructuring had been recognised as a foreign main proceeding subject to a moratorium on enforcement of debts governed by English law. The bank’s foreign representative applied for an order making the stay permanent. Norris J granted the application. It was central to his reasoning that the stay, though permanent, was capable of being modified on the application of an individual creditor who could show that their claim was governed by English law and had not been discharged by the Kazakh insolvency process; BTA, at [14].

Norris J did not, however, decide whether the stay should be lifted so that claims governed by English law could be enforced; that would be a matter to be decided at the point such an application might be made. By contrast, Hildyard J noted that, though procedural in form, the relief if granted would determine the substantive issues between the parties [115].

Hildyard J held that the court in Pan Ocean Co Ltd, Re [2014] EWHC 2124 (Ch) had correctly held that the Model Law and CBIR were "concerned with procedural matters" and not substantive rights, nor the recognition of foreign judgments against third parties. Whether the relief sought was procedural or substantive depended on whether it would affect, other than in a purely temporal way, the substantive rights and obligations of both parties [143]. Pan Ocean affirmed that universalism did not empower an English court to vary substantive rights conferred under English law by the expedient of procedural relief, which intended to align the rights of English creditors with the rights which they would have under the relevant foreign law [146]. It was a jurisdictional bar. A permanent stay could not be deployed as a way round the rule in Antony Gibbs [155].

Interestingly, Hildyard J would have declined to exercise his discretion in the absence of this jurisdictional bar. Article 22 of the Model Law requires courts to consider whether in granting or denying relief, the interests of the parties are “adequately protected”. The question then becomes whether the rights of a creditor under English law could ever be "adequately protected" by intervention which negates or varies rights. Hildyard J was reluctant, in a reconstruction rather than insolvency context, to remove or vary individual rights in the name of universalism [158].