The UK High Court had the opportunity to overturn the Gibbs rule in January, a long-established principle that provides that a debt governed by English law cannot be discharged or compromised by a foreign insolvency proceeding. But it decided not to do so.
As such, the Gibbs insolvency rule is coming under increasing scrutiny and Brexit provides an opportunity to change course.
In Bakhshiyeva v Sberbank of Russia the court ruled that it was prohibited from ordering the discharge of the creditor’s claim. The case has moved on to the Court of Appeal, which will decide if the moratorium of restructuring provisions decided in Azerbaijan should be extended to the UK. The decision has sent a signal to creditors with English law claims supposedly extinguished by foreign insolvency proceedings to hold out as they could be protected by English law. But as the UK leaves the EU and its insolvency framework, there are questions as to what direction UK insolvency law will take next.
Many have criticised the rule, branding it outdated and unsuitable for a more open and globalised world 128 years after it was first applied. In a number of jurisdictions, there have been steps towards modified universalism, the principle where national insolvency courts seek to unify insolvency laws in the spirit of international comity.
Orrick partner Stephen Phillips agrees this is the right approach. "When a group has a meaningful presence in multiple jurisdictions it seems appropriate to abandon the rule, subject to the ability of the UK courts not to recognise insolvencies where there are public policy reasons to do so," he said.
It’s unclear what step the UK will take next and this indecision is already impacting the market. In a case only this week, the administrators supervising Nortel Networks decided not to extend the administration period primarily because of Brexit. It remains to be seen whether the recast Insolvency Regulation - an EU regulation applying to companies with operations in more than one member state which prioritises insolvency proceedings in the member state said to be its centre of main interests (COMI) - will continue after Brexit. Without adequate legislation in place, the UK will have company voluntary arrangements and administrations that are not automatically recognised within the EU and this could mean UK legal recognition is granted only on a case-by-case basis. This lack of certainty is unlikely to satisfy creditors.
In a conference in June last year, Lord Neuberger said there are powerful arguments for revisiting the Gibbs rule and praised the principle of common law universalism.
Phillips said that the UK should push for mutual recognition in negotiations with the EU that would satisfy both sides and abandon the parallel process, launching legal proceedings in separate countries which often occurs when there are Cayman schemes and UK schemes of arrangement. This would help reduce costs and time spent on legal procedures.
"What would help is if there was a pre-agreed list of jurisdictions which have high standards of judicial processes where there would be a presumption that UK courts would grant full recognition to foreign processes – top of the list would be the US and Commonwealth countries which have a common law tradition," he said.
Source: International Financial Law Review