At midnight on 31 December 2020, the Brexit transition period came to an end and although the announcement in the days before that a deal had been reached brought relief for many sectors, the deal did not provide for U.K./EU recognition. In this context, the decision in Bakhshiyeva v Sberbank of Russia will be of critical importance when determining international restructuring strategies involving English law documentation.
In December 2018, the Court of Appeal unanimously upheld the High Court ruling in Bakhshiyeva, confirming that English law-governed debt cannot be discharged under a foreign insolvency proceeding unless the creditors have voluntarily submitted to that proceeding. In reaching this conclusion, the court considered an application for an indefinite stay under the Cross-Border Insolvency Regulations 2006 ("CBIR") and found that the CBIR could not be used as a back door to recognition of foreign insolvency proceedings.
The case involved the state-run Azeri commercial bank, OJSC International Bank of Azerbaijan ("IBA"). IBA had successfully proposed a plan to restructure $3.3 billion of its debt, receiving approval from creditors holding 94% of the debt. However, creditors Sberbank and Franklin Templeton didn't vote on the plan and argued that it could not bind them. Sberbank was the sole lender under a $20 million term facility agreement and Franklin Templeton were the beneficial owners of $500 million Notes. Both the Sberbank Facility and the Franklin Templeton Notes expressly state that they are governed by English law.
In June 2017, IBA had obtained a Recognition Order in the U.K. High Court recognising the Azeri restructuring proceedings as foreign main proceedings under the CBIR. The Recognition Order imposed a wide-ranging moratorium, preventing creditors from commencing or continuing any action against IBA or its property without permission from the Court. The moratorium was binding on all creditors irrespective of whether they voted for the plan or not, thereby capturing Sberbank and Franklin Templeton.
However, under the rule in Gibbs & Sons v Sociětě Industrielle et Commerciale des Mětaux (1890) 25 QBD 399, it is the proper law of a debt which governs how it can be extinguished. Accordingly, the Sberbank and Franklin Templeton debts, being English law-governed debts, could only be discharged under English law, not by foreign law schemes or plans. Consequently, under the Gibbs rule, Sberbank and Franklin Templeton should be free to enforce their debt over any U.K. assets.
Court of Appeal decision
As the moratorium was due to lapse, IBA had applied to continue the moratorium, arguing that all creditors' claims should be stayed indefinitely. The Court of Appeal considered whether an indefinite stay under Article 21(1)(a) or (b) of the CBIR could be used to circumvent the longstanding Gibbs rule. They stated that an indefinite stay could only be granted if:
- it was necessary to protect the interests of creditors; and
- that a stay was an appropriate way of achieving that protection.
It was unanimously held that neither of these conditions had been satisfied as the restructuring plan had been completed and would only be "kept alive artificially".
The Court's analysis of Article 21 was crucial in reaching their decision. It was emphasized that the CBIR was procedural not substantive, particularly Article 21 whose main purpose was to provide temporary breathing space. So, whilst the CBIR can help support an ongoing foreign insolvency, they cannot be used to obtain recognition of discharge of English law-governed debt under that foreign insolvency. Further, the Court of Appeal held that if the power to grant a stay had been intended to override the substantive rights of creditors (such as those under the Gibbs rule), Article 21 would have explicitly stated as much.
The Court of Appeal ultimately agreed with the High Court that, although the Gibbs rule has sustained criticism for being archaic and Anglo-centric, it falls to the Supreme Court to determine if it should be reviewed. Accordingly, the Gibbs rule was upheld as Sberbank and Franklin Templeton had not submitted to the foreign insolvency proceedings and therefore did not fall within the exception of the rule. The appeal was therefore dismissed and the High Court's decision to refuse to extend the moratorium was upheld, allowing Sberbank and Franklin Templeton to proceed with their claims through the English courts.
The parties are reported to have reached a settlement agreement in June 2019 under which IBA paid Sberbank $20 million in exchange for securities issued in the name of Sberbank during the restructuring of IBA.
The emergence of a range of new restructuring procedures across Europe will allow companies a choice to find the process that best fits their circumstances. However, under the Gibbs rule, if English law-governed debt is involved and assets are located in the U.K., the CBIR cannot be used to obtain recognition of discharge of that English law-governed debt and insolvency practitioners will need to consider how to address this in parallel to any foreign law proceedings.