In the consultation, the UK government acknowledged that the implementation of the MLIJ in full would undermine the rule in Gibbs. In particular, it would mean that foreign courts would be provided with the means to override Gibbs, through insolvency-related judgments regarding contracts containing an English law jurisdiction clause, on the condition that the foreign court would be exercising its jurisdiction in a way that is compatible with the law of England and Wales.

To prevent this happening, the UK government proposed implementing only Article X of the MLIJ. This would be intended to create a framework for the recognition of insolvency related judgments under English law.

As a result of the concerns expressed by the respondents to the consultation, the UK government agreed to not implement Article X at this time, and to consult further.

What is the jurisdiction?

Gibbs established the principle that where a contract has a specific jurisdiction clause, this cannot be compromised or discharged by insolvency proceedings in a different jurisdiction. Obligations governed by English law cannot be discharged by foreign law proceedings. They can be discharged only under English law, unless the creditor agrees to the foreign law discharge of the obligations owed to them.

It is common for international contracts to contain a jurisdiction clause in favour of the courts of England and Wales. Following Gibbs, a restructuring using insolvency proceedings in a foreign jurisdiction cannot be effective against debts owed under a contract with an English jurisdiction clause. Following Gibbs, these debts remain outstanding after the foreign insolvency proceedings conclude, and should then be properly pursued against assets held in England and Wales.

Gibbs has long been criticised for causing significant difficulties for foreign companies seeking to restructure their debts in their native jurisdiction. These criticisms were brought into sharp focus in 2018 when the Court of Appeal considered the application of the rule in Gibbs to the MLCBI in Bakhshiyeva v Sberbank of Russia and others [2018] EWCA Civ 2802.

In that case, the Court of Appeal unanimously confirmed that debt governed by English law cannot be discharged under a foreign insolvency proceeding unless the creditors have voluntarily submitted to the proceedings. Bakhshiyeva (as representative of the OJSC International Bank of Azerbaijan) had applied for an indefinite stay of all creditors’ claims being brought against the Bank in England. This was refused at first instance. On appeal, the Court of Appeal considered whether an indefinite stay under Article 21(1)(a) or (b) of the CBIR was a means of circumventing the rule in Gibbs. Article 21(1)(a) and (b) of the CBIR provides the court with a discretionary power to stay proceedings or stay the execution against the debtor’s assets where it has recognised a foreign insolvency judgment. The court must be satisfied that to do so is necessary to protect the interests of creditors.

Any amendments to the rule in Gibbs may undermine the current legal certainty around debt governed by English law

The Court of Appeal held that an indefinite stay, pursuant to Article 21(1)(a) or (b) of the CBIR, could be granted only if it was necessary to protect the interests of creditors and that granting a stay was the appropriate means of doing so. These conditions had not been met and so the court dismissed the appeal.

Criticisms of Gibbs

Many practitioners argue that the rule in Gibbs is out of date in the modern insolvency landscape. It has been criticised as undermining international trade, through enforcing the jurisdictional rule in cross-border insolvency scenarios instead of the legal principles applied in other jurisdictions where the insolvent party’s “centre of main interests” may be located.

Gibbs has also been criticised as an example of English law being outdated in relation to the management of cross-border insolvencies, particularly the extent to which English law values co-operation between jurisdictions for the benefit of creditors. The Singapore decision of Pacific Andes Resources Development Ltd and other matters [2016] SGHC 210 and the US decision of In Re Agrokor dd, 591 BR 163 (Bankr SDN. 2018) have both taken different approaches to the English courts.

The Court of Appeal in Bakhshiyeva recognised that the Gibbs rule is Anglo-centric, however, it accepted that it is for the Supreme Court to refine or amend the rule in Gibbs. Until that happens, or until the UK government reaches a decision on whether or not to adopt Article X of the MLIJ into the CBIR, the well-established rule in Gibbs continues to apply; if the debt is governed by English law, the CBIR cannot be used to obtain recognition of the discharge of that debt.

Practitioners should be careful as to what they wish for. Although there are legitimate criticisms of the rule in Gibbs, any amendments to the rule in Gibbs may undermine the current legal certainty around debt governed by English law.