The application of the Cross Border Insolvency Regulations 2006 (CBIR), which contain the UNCITRAL Model Law, in English courts has been central to two major overseas restructurings in the past few months. In the restructurings of both Agrokor dd and the International Bank of Azerbaijan, foreign representatives, or FRs, have sought recognition of their foreign proceedings in the English High Court under the CBIR and sought to rely on the benefit conferred by such recognition. Both cases are likely to be appealed to the Court of Appeal this year.
Recognition under the CBIR is the same in scope and effect as if the company “had been made the subject of a winding-up order under the Insolvency Act 1986”: CBIR, Sch 1, Art 20(2). In other words, there is a moratorium on proceedings and on the enforcement of orders by way of execution on the company’s assets, and the right to dispose of, or encumber the company’s assets will be suspended in the English jurisdiction.
Agrokor’s FR was successful in obtaining recognition of its extraordinary administration proceedings in England. Sberbank, in the first challenge of its kind, was unsuccessful in resisting the Agrokor application, arguing that the extraordinary administration proceedings were not the type of proceedings that should be recognized under the CBIR. HHJ Paul Matthews, hearing the Agrokor case, explained the tests that must be passed by an applicant seeking recognition under the CBIR in English courts. Importantly, the judge found nothing in the CBIR to prevent recognition of a foreign proceeding, which in the foreign court involved a group of companies, but in the English court, recognition related only to an individual debtor.
IBA had sought to extend its moratorium past the termination of its restructuring proceedings in order to prevent certain creditors with English law-governed debt from enforcing against its assets after the moratorium expired. IBA had had its restructuring approved by the court in Azerbaijan; however, two creditors of the bank, who held English law-governed debt, disagreed with the terms of the restructuring and sought to enforce their claims against IBA’s assets.
IBA’s FR therefore sought to indefinitely extend the moratorium granted to it during the bank’s restructuring. Such an extension was requested in order to prevent IBA’s English creditors from enforcing their claims against IBA’s assets after the termination of the restructuring. Justice Hildyard, having heard arguments from Daniel Bayfield QC on behalf of the FR, concluded that he was bound by the Court of Appeal precedent set in Gibbs v Societe Industrielle des Metaux (1890) 2 QBD 399 (known as the rule in Gibbs). The judgment explains that the rule in Gibbs provides that a debt governed by English law cannot be discharged by a foreign insolvency proceeding.
Following Brexit, the CBIR is likely to play a greater role in the recognition of restructurings of English law-governed debt. Both the Insolvency Regulation (EC No. 2015/848) (IR) and the Brussels Regulation (EU 1215/2012) (BR) (together, the European Regulations), which provide for European-wide recognition of bankruptcies and judgments, generally could become less effective. This is because both the BR and the IR are drafted to provide recognition in respect of: (i) proceedings opened in, or (ii) judgments given in, “Member States.”
Once Brexit has taken place, the U.K. will no longer be a member state and therefore will no longer benefit from automatic recognition and enforcement under the European regulations. Domestic legislation will not to able to compel foreign courts to recognize English law judgments or orders made by an English court. In order for the U.K. to benefit from automatic recognition in other member states, it would have to negotiate a position with the EU and its member states so that they continue to recognize English insolvency proceedings and judgments.
In the alternative, the EU could introduce an overarching update to the European regulations to ensure that the regulations continue to benefit the U.K. It is clear that the U.K. would welcome such an EU-wide update, and the reciprocity afforded by the English courts would be beneficial to parties in foreign member states seeking enforcement and recognition of a judgment or proceedings in the U.K. For this outcome to be reached, the U.K. would be the only non-EU state to have automatic recognition of its proceedings and judgments across the EU. Given the current testy relationship between the British government and the EU bodies, this could be difficult.
The decision of HHJ Matthews in Agrokor demonstrated that the English courts are willing to broadly recognize foreign proceedings under the CBIR and do not have too high a hurdle for the types of proceedings that will be granted recognition. But as demonstrated by the first instance decision in IBA, the CBIR in its current form appears to lack the teeth to do anything more than grant breathing space to a debtor, while it implements a binding restructuring. Further, Justice Hildyard held in the IBA case that the CBIR cannot bypass the rule in Gibbs.
The Model Law as currently drafted provides mainly for coordination and assistance among courts and not for the recognition and enforcement of foreign insolvency judgments. Consequently, it is unlikely to provide a definitive solution in its current form.
The UNCITRAL Working Group V met in Vienna in December 2017 to discuss possible new legislation. The group produced a draft “Model Law on cross-border recognition and enforcement of insolvency-related judgments.” This legislation would provide that where an insolvency-related foreign judgment has effect and can be enforced in its originating state, then it should be recognized in all states adopting the Model Law. The draft goes considerably further than the CBIR in providing for both recognition and enforcement, echoing the powers in the BR and IR.
With uncertainty facing the European regulations in England, the CBIR’s interpretation and effect in the English courts is likely to become of greater importance to creditors. New treaties produced by UNCITRAL will also provide assistance to the jurisdiction, although it is worth noting that not all other EU member states have adopted the Model Law (currently, it is only Greece, Poland, Romania and Slovenia).
The outlook for restructurings in England post Brexit looks grey given:
- There is no clear recognition and enforcement procedure in the CBIR;
- The future is uncertain under the European regulations; and
- There is limited application in Europe for any future UNCITRAL legislation.
Perhaps a wise decision would be a move towards a U.S.-style chapter 15 jurisprudence, allowing the English courts to recognize the decisions of foreign courts, permitting for the usual public policy exceptions.
Recognition of Agrokor’s Extraordinary Administration
Agrokor’s restructuring is being implemented pursuant to the Law on Extraordinary Administration Proceedings in Companies of Systemic Importance for the Republic of Croatia (EAL), passed by the Croatian Parliament on April 6, 2017. The company made an application to the Croatian court for the commencement of extraordinary administration proceedings, which was accepted on April 10.
In the Agrokor proceedings, which took in place in October, the FR was successful in persuading HHJ Paul Matthews that the EAL was a type of proceeding that should be granted recognition under the CBIR. In the first challenge of its type, Sberbank Russia, Agrokor’s largest creditor, sought unsuccessfully to resist the foreign representative’s application. David Allison QC on behalf of Sberbank argued before the court that the EAL was not a qualifying “foreign proceeding” for the purposes of CBIR. He sought to argue that the EAL was not a “law relating to insolvency for the purposes of reorganisation or liquidation” and lacked the key essential features of an insolvency law. Furthermore, he explained that the CBIR itself did not apply to proceedings such as the EAL, which are in respect of corporate groups rather than individual debtors.
Sberbank is likely to lodge an application to the Court of Appeal in England, having been deniedpermission to appeal by HHJ Matthews in December.
Indefinite Moratorium for IBA
IBA’s restructuring is being implemented by way of a voluntary restructuring pursuant to Article 57.11 of the Azerbaijan Law on Banks. On April 25, 2017, IBA filed a petition in the Nasimi District Court of Azerbaijan to approve the commencement of a voluntary restructuring. On May 4, 2017, the Azeri court made an order approving the commencement of a voluntary restructuring in respect of IBA. Following an application by IBA on June 5, Justice Barling granted recognition of the plan in England as a foreign main proceeding under the CBIR and a moratorium was put in place.
The IBA restructuring proceedings were originally due to complete on Jan. 30, 2018, with the CBIR moratorium also scheduled to end at this time. IBA, however fearing that certain dissenting creditors who hold English law debt would seek to enforce their rights against IBA’s assets in England after cessation of the moratorium, made an application to the English court (appearing before Justice Hildyard on Dec. 13-15), seeking to have the moratorium extended indefinitely against such English law creditors.
Gabriel Moss QC and Barry Isaacs QC representing the English law creditors, Franklin Templeton and Sberbank, respectivel,y argued that the CBIR moratorium could only remain in place as long as IBA’s restructuring was ongoing. They explained that the CBIR moratorium was designed only to provide “breathing space” to a debtor, not to provide a permanent solution. It was further explained that the rule in Gibbs (dictating that an English law-governed debt can only be extinguished by an English court) remains binding law, meaning that the IBA restructuring is not capable of extinguishing the English law creditors rights.
Usually the rule in Gibbs is sidestepped using an English law scheme of arrangement in parallel to cram down creditors, although in the IBA restructuring, this step appears to have been overlooked. IBA’s counsel had tried to present the argument that an indefinite extension of the moratorium granted under the CBIR would be a procedural solution with Daniel Bayfield QC arguing that “the question of enforcement is different from the question of discharge.” In other words, if the moratorium is extended indefinitely, preventing the creditors with English law debt from enforcing their claim, their rights themselves, as a matter of strict legal definition are not discharged or compromised.
Justice Hildyard, however, was not convinced by this argument and concluded that the extension of a moratorium indefinitely over the enforcement of a right has the effect of discharging or varying that right itself. The judge was bound by the rule in Gibbs and felt that he did not have jurisdiction to extend the moratorium indefinitely.
Hildyard J further concluded that any moratorium granted under Art. 21 of the CBIR must be limited in time to the duration of the foreign process.
Following the hearing, the IBA FR applied to the Azerbaijani court for an extension of the proceeding for 180 days, which was granted on Jan. 29. This extension means the FR maintains standing and can make its appeal to the Court of Appeal. The extension process was made possible due to amendment of the Azerbaijan Law on Banks enacted in January this year.
Interpretation of CBIR by English Courts
The CBIR were enacted under the Insolvency Act 2000 and enabled the Model Law drafted by the United Nations Commission on International Trade Law (UNCITRAL) relating to cross-border insolvency to “have the force of law in Great Britain.” Whereas the EU Insolvency Regulation was designed to regulate insolvencies between member states of the European Union, and is therefore reciprocal between them, this Model Law was intended for use in the wider world. But, unlike the EU Insolvency Regulation, the Model Law does not require reciprocity from other countries in order for the enacting state to be obliged to recognize foreign insolvency procedures.
The two hearings have highlighted two aspects of the CBIR for evaluation by the English courts, namely:
- which tests must a foreign proceeding satisfy before it can seek recognition under the CBIR in England; and
- what is the scope of the stay granted to a foreign proceeding under the CBIR? Can it exist indefinitely.
What tests must a foreign proceeding satisfy before it can seek recognition under the CBIR in England?
HHJ Matthews first instance judgment handed down on Nov. 11 considered the arguments presented by Agrokor’s FR and Sberbank. The relevant test was found to be whether the EAL was a proceeding that:
- originated from a law relating to insolvency;
- was subject to the control or supervision of the court;
- was a collective proceeding; and
- for the purposes of reorganization or liquidation.
A party resisting recognition, having failed to persuade the court that the proceeding has failed the initial four tests, can lastly attempt to argue that the proceeding is “manifestly contrary to English public policy,” this being the public policy test. This final test remains an exceptionally high hurdle for a respondent to pass.
Sberbank was ultimately unsuccessful in arguing that that was not possible to recognize a foreign proceeding in England in respect of a group of companies, where recognition is sought only in relation to one specific company. Agrokor’s foreign representative resisted this argument. HHJ Matthews, having considered the relevant case law and the UNCITRAL Legislative Guide on Insolvency Law, explained that “there is nothing in the CBIR to prevent a foreign proceeding being recognised, which in the foreign court involves a group of companies, but the recognition is sought in this country in relation only to a particular individual debtor” (emphasis added).
What is the scope of the stay granted to a foreign proceeding under the CBIR? Can it exist indefinitely?
Justice Hildyard in the IBA case explains that the aim of the CBIR is to assist in the development of “universalism.” The ultimate object of universalism is to provide a single forum applying a single regime to all aspects of a debtor’s affairs on a worldwide basis. It is, however, noted that the CBIR is not dependent or premised upon reciprocal recognition and it does not address substantive domestic insolvency provisions. It does not seek to achieve substantive uniformity or reconciliation between different jurisdictions and their substantive laws.
The consequences of recognition of a foreign restructuring under the CBIR is that an automatic stay is granted under Article 21 of the Model Law (contained in the CBIR).
The rule in Gibbs stretches back over 150 years and is the most frequently cited authority for the general proposition that a debt governed by English law cannot be discharged or compromised by a foreign insolvency proceeding. Such English law debt can only be discharged or compromised by an English court.
Justice Hildyard, despite its criticism, explains that the rule has been repeatedly applied at all levels of the courts of England and Wales without adverse comment. The question is not therefore whether the rule applies, but whether the principles of modified universalism in the CBIR allow the court to grant relief without falling foul of the rule. In short, the answer at this stage seems to be no.
The take-away from the High court decision in IBA is that any moratorium granted under Article 21 of the CBIR must be limited in time to the duration of the foreign process it concerns.