Recognition of Insolvency Related Judgments: an Undetermined Sphere of International Insolvency
Medhashree Verma and Siddharth Jain
The Model Law on Cross Border Insolvency (MLCBI) prepared by the United Nations Commission on International Trade Law (UNCITRAL) has created an international standard for cross border insolvency laws. To complement this, the UNCITRAL framed the Model Law on Insolvency Related Judgments, 2018 (REIRJ), which aimed at laying down clear rules of procedure for recognition and enforcement of Insolvency Related Judgments (IRJ). Under the MLCBI, the enforcement and recognition of IRJs became uncertain. These uncertainties stemmed from the clash between some common law rules and the modern insolvency regime that MLCBI sought to establish. These common law rules come from the cases of Antony Gibbs & Sons v. Société Industrielle et Commerciale and Rubin v Eurofinance SA. Implementation of these rules is considered to be in direct conflict with the intent and purpose of the modern insolvency law regime.
In order to eliminate this issue, the UNCITRAL framed the REIRJ which, if enacted, may do away with these ambiguities. To this end, the article discusses the two cases and its criticisms, and analyses the effect that REIRJ has on them. It views these old cases with a fresh lens to understand their impact on the UK’s modern insolvency law and whether the REIRJ, if enacted, actually does away with these rules for insolvency proceedings.
I. The Rule in Gibbs
The UK Court of Appeal propounded the Gibbs principle in the case of Antony Gibbs & Sons v. Société Industrielle et Commerciale. It postulated that a discharge of debt must be governed by the substantive law of the contract and by the courts of that jurisdiction alone. This rule came to have multifarious effects on the development of modern insolvency law which are discussed later in the article.
A. The subsequent timeline
The insolvency community’s disapproval of the Gibbs principle has spanned over a lengthy period, with occasional manifestations in judgments. One of the major judgments which led to the rebirth of this debate was AWB Geneva SA v North America Steamship Ltd. The England and Wales High Court, acknowledging the existence of the Gibbs rule, held that it still holds a binding precedential value. Several subsequent judgments have followed this conclusion, with stronger criticisms to the Gibbs rule including but not limited to incentivising hold-outs, multiplicity of proceedings, and proscribing lex fori concursus (these will be discussed later). All the criticisms were duly received by the courts which further declared that undoubtedly, ‘there is much to be said for developing English law in the manner suggested’.
Interestingly, several other jurisdictions, having mature insolvency regimes similar to the UK, have already revised their stance on the Gibbs rule. Following the principle of universalism, courts in the United States (US) have maintained a clear stance of not recognising the Gibbs principle. They have persistently stated that its precedential value in England has no effect in the US. Similarly, Australian courts have also maintained a uniform stance inclined towards universalism. Canadian courts, however, have tried to align themselves with the UK following territoriality. Singaporean High Court, in the landmark case of Re Pacific Andes Resources Development Ltd, discarded the rule in Gibbs. Herein, the court dealt with this issue from Professor Ian Fletcher’s perspective of reasonable expectations of a commercial entity. According to this principle, in case of a contract with a foreign company which goes into insolvency, the possibility of discharge of obligations outside the proper law of the contract should enter into the party’s reasonable expectations.
Unfortunately, the debate over the Gibbs rule came to full circle in the English jurisdiction with the OJSC International Case, wherein the court, upholding the rule, held that MLCBI’s scope is ‘limited to some procedural aspects of cross-border insolvency’.
Despite the precedential burden of the Gibbs rule in common law, the UK’s fidelity to the Gibbs principle seems to lose grip owing to the adoption of the MLCBI and the newly proposed REIRJ, as they advocate for principles which are antagonistic to the territorial Gibbs rule.
B. Implications of the Gibbs rule
The continuation of the Gibbs rule would be contrary to the principles of modern insolvency as highlighted by the UNCITRAL Model Laws and the implications arising thereafter have been provided below:
- Forum Shopping
Forum shopping enables a debt-ridden entity to choose the most suitable jurisdiction for reorganisation. The Gibbs rule is at divergence with this mechanism as it overlooks any discharge of debt which is not made under the proper law of the contract.
- Applicability of Lex Fori Concursus
The Gibbs rule misconceives discharge of debt as a contractual issue rather than an incidental procedural matter “thereby appearing to represent the ‘old philosophy of territorialism bunkered within the common law”. Since the discharge of a debt under the insolvency proceeding is a procedural matter and part of the lex fori concursus (law of the place where insolvency proceedings are initiated), the same must prevail over the lex contractus (law governing a contract).
- Consensual Agreement
The proponents of the Gibbs principal assert the validity of this rule in terms of the expectations of the parties to a contract. However, insolvency proceedings are not a matter of consensual agreement. They require parties to reasonably expect that in case of debtor’s insolvency, bankruptcy laws will discharge the contractual obligations.
- Incentivising hold-outs
Hold-out is a mechanism whereby a creditor opts-out/delays its participation in the collective insolvency proceedings to leverage higher debt recovery than the similarly situated creditors. A way to curb this is to adopt domestic restructuring systems which favour majority rule over individualistic claims and avoid any procedure which fosters it. The Gibbs rule encourages creditors to opt for hold-outs. The same must also be discontinued.
- Multiplicity of proceedings
If the spirit of Gibbs is implanted in every jurisdiction, it will lead to a situation where every creditor could initiate proceedings in its court causing a multiplicity of proceedings. Thus, to achieve a successful insolvency proceeding, multiple courts will have to approve the movement of assets, consistently. In taking such decisions, courts will consider the interests of local creditors. Since the interests of the entity and creditors are antagonistic, proceedings are likely to result in a deadlock.
- Overturn by Legislative enactment
Only Legislative enactments can overturn common law principles such as Gibbs. The Gibbs principle would be automatically overturned, once states enact MLCBI, given no reservations are made to that effect. According to the choice of law which is proffered by the legislative guide on insolvency law, while the validity of such rights is governed by the substantive law, the treatment of the rights is governed by lex fori concursus. This has the effect of overturning the Gibbs principle.
- Overturn by Literal Interpretation
The legislative intent to discard the Gibbs principle and enforce the mandatory nature of recognition of foreign IRJ is evidenced by the language of the legislative text, wherein an interplay between the terms ‘shall’ and ‘may’ has been used in Article 13 and 14 of the REIRJ, respectively. Article 13 begins with ‘insolvency-related judgment shall be recognized’ mandating the recognition of IRJs. In contrast, Article 14 begins with ‘recognition and enforcement of an insolvency-related judgment may be refused’ denoting that the recognising court is not obligated to deny recognition even if one condition is engaged.
- Decision on merits
REIRJ requires the recognising court to adjudicate without reopening the merits of the decision given by the originating state. However, the Gibbs principle requires the recognising courts to assess the fairness of the plan. This is inconceivable without reopening the merits. Consequently, if a common law country, following the Gibbs rule, adopts REIRJ, this would be an essential point of conflict between them.
Thus, the Model Laws have tried to rectify inconsistencies and ambiguities in the realm of recognition of IRJs by providing for articles 13 and 14 as discussed above.
II. Rubin and its Implications
In Rubin v Eurofinance, the UK Supreme Court held that the traditional conflict of law rules framed by the eminent British jurist AV Dicey must be followed for binding a British subject (including a corporate debtor) by foreign insolvency proceedings. The traditional conflict of rule in contention, in this case, was regarding submission to foreign jurisdiction. These common law rules for submission to jurisdiction are in direct conflict with modern insolvency principles which promote universalism.
A. The Case and Subsequent Timeline
The facts concerned Eurofinance applying for the United States Chapter 11 proceedings. After the proceedings commenced in the US Bankruptcy Court, claims were made against the appellants in the form of ‘adversary proceedings’ and a judgment was issued. The Chancery Division in the UK recognised the proceedings as the ‘Foreign Main Proceedings’ but the judgments of the ‘adversary proceedings’ were not recognised as the judgment debtor did not submit to the jurisdiction of the US Court.
However, following the correct approach to recognise IRJs, the Court of Appeal reversed the decision and held that the common law rules to recognise foreign judgments have no application because the Cambridge Gas case upheld insolvency judgments as a mechanism for collective execution and enforcement of established rights, and not as judgments in personam (against the person) or in rem (against the world) on which traditional conflict of law rules have to be applied. This interpretation by the Court of Appeal paves the way for modern judicial approach towards recognition of IRJs.
The matter went to the Supreme Court to consider if a relaxed rule must be devised to enforce IRJs. The court made this discussion a matter of policy. It held that this issue must not become a subject for judicial innovation but should remain within the powers of the Parliament. Further, it was observed that the MLCBI cannot provide for recognition and enforcement of IRJs against third parties by implication.
This decision overruled the celebrated judgment in Cambridge Gas and made recognition of IRJs in UK unpredictable by subjecting them to territorial common law rules. It was contrary to the spirit of modified- universalism and co-operation as envisaged under the Model Law. Rubin reduced the effectiveness of the MLCBI in the UK by holding that such IRJs are excluded from the international insolvency regime. It expands the concept of ‘submission’ and if becomes an accepted position, the counter-parties to insolvency proceedings would not appear, encouraging holdouts. They will seek application of the traditional rules in the court of their territory for non-recognition of IRJs, defeating the purpose of the insolvency model laws.
The following points discuss the provisions in REIRJ and how it tackles the confusion created by Rubin regarding recognition of IRJs and establishes a new approach for the same.
- Model Law on Insolvency Related Judgments
One reason for framing the REIRJ was to discard the uncertainty and unpredictability brought about by Rubin. The REIRJ has incorporated Article X- which makes a cross-reference to Article 21 of MLCBI and clarifies that it includes the recognition and enforcement of IRJs as well. Article X was included to eliminate the confusion caused by the decision in Rubin, which specifically held that Article 21 of MLCBI cannot recognise and enforce an IRJ.
The pressing issue is whether REIRJ would be effective in overturning the decision in Rubin. This is possible only if the UK adopts REIRJ. However, as states can adopt model laws with modifications and if the legislature excludes Article X, the reference would be made to MLCBI itself. To this end, it must be noted that Article X is merely a clarificatory provision, which means Article 21 MLCBI included the power to grant recognition to IRJs since its enactment. Therefore, Article 21 has the power to grant recognition to IRJs and should be used by the courts for the same.
- Article 14(g) of REIRJ
Article 14 of REIRJ provides for the ‘inadequate jurisdiction’ exception. It provides for four grounds on non-fulfilment of anyone of which the receiving court gets discretion to refuse the recognition and enforcement of the judgment. They are based on explicit consent, submission to the court, a similar basis for determining jurisdiction, and compatibility with the receiving state. The same would go to include the notions of procedural fairness and reasonability as grounds on which recognition could be refused.
These provisions can address the concern raised by the decision in Rubin which denied recognition because the judgment debtor had not submitted to the jurisdiction of the court. Such decisions bring insolvency resolutions to a halt. To this end, article 14(g) expands the possibility of recognition of IRJs by providing for ‘adequate jurisdiction’. It remains a discretionary provision as it uses the word ‘may’. Therefore, even if one of the condition, as stated in the provision, is violated, the receiving court can still recognise and enforce the judgement keeping in mind the central tenets of international insolvency i.e. universalism and co-operation.
The REIRJ is a positive way forward in Cross Border Insolvency. It attempts to eliminate the issues faced in proper resolution of insolvency cases. However, how states implement REIRJ and the extent to which it is altered will have a deep impact on the same. Issue remains about the ability of the Model Laws to discard the Gibbs principle. Given that no country has adopted REIRJ, its application and interpretation are yet to unfold.
Rubin clarifies that the application of traditional conflict of law rules posits a hurdle in cross border insolvency matters. The states must venture out from the traditional rules, and instead adopt more flexible principles for greater cooperation between countries on insolvency matters. States must leave behind the approach of territorialism and creditor expectation of equal treatment in cross border matters, and instead universalism must become the norm with limited exceptions. As REIRJ is enacted in different jurisdictions, it will open a plethora of moot points. However, the courts and the legislature must always uphold the basic tenets of cross border insolvency while giving matters consideration.
Antony Gibbs & sons v La Société Industrielle et Commerciale des Métaux  LR 25 QBD 399.
AWB Geneva SA v North America Steamship Ltd2007 EWHC 1167 (Comm).
Global Distressed Alpha Fund Limited Partnership v PT Bakrie Investindo 2011 EWHC 256 (Comm).
Re Agrokor DD 591 B R 163 (BankrSDNY 2018) .
Re Bulong Nickel Pty Ltd  WASC 226 .
Re Pacific Andes Resources Development Ltd and other matters  SGHC 2010 .
Ian F Fletcher, Insolvency in Private International Law (2nd edn, OUP 2005) [2.129].
Re OJSC International Bank of Azerbaijan  EWCACiv 2802 .
Cambridge Gas Transport Corp v Official Committee of Unsecured Creditors (of Navigator PLC Holdings and Ors)  UKPC 26.
Look Chan Ho, Cross-Border Insolvency: Principles and Practice (Sweet & Maxwell 2016).
Ibid at 6.
Bulong Nickel Pty Ltd  WASC 226 .
Dr Neil Hannan, ‘Recognition of Foreign Insolvency Judgments’Insolvency Law Journal (Vol 27 No 1, 2019).
Rubin v Eurofinance SA UKSC 46, .
UNCITRAL,‘Legislative Guide on Insolvency Law’ (2004)<www.uncitral.org/pdf/ english/texts/insolven/05-80722_Ebook.pdf> last accessed 10 July 2020.
United Nations, UNCITRAL Model Law on Recognition and Enforcement of Insolvency Related Judgment with Guide to Enactment (United Nations Publication 2018).
UNCITRAL ‘Report of Working Group V (Insolvency Law) on the work of its forty-sixth session’ (26 January 2015) A/CN 9/829.
Ibid at 14.
 Ibid at 8.
Gordon Stewart,‘The recognition and enforcement of foreign insolvency derived judgments – Rubin’ INSOL International: last accessed 20 June 2020.
United Nations, UNCITRAL Model Law on Recognition and Enforcement of Insolvency Related Judgment (United Nations Publication 2018) .
 Ibid .
Evan J Zucker and Rick Antonoff, ‘UNCITRAL’s Model Law on Recognition and Enforcement of Insolvency-Related Judgments – a universalist approach to cross-border insolvency’ INSOL International Special Report: last accessed 22 June 2020.