The Gibbs Rule is back in the global spotlight. This English common law rule dates back to a decision in Anthony Gibbs & Sons v La Societe Industrielle et Commerciale des Metaux issued in 1890 and states that a discharge of debt under the insolvency law of a foreign country is only recognised in England if it is a discharge under the law applicable to the contract. From it follows the general proposition that a debt governed by English law cannot be discharged or compromised by a foreign insolvency proceeding—be it in Singapore, the US, or any EU country after Brexit. From a political perspective, the renaissance of the Gibbs Rule seems hardly surprising. It is a valuable tool to secure the need for English schemes of arrangements and company voluntary arrangement (CVAs) whenever the debt to be restructured is subject to English law.
Of course, foreign courts are not happy. On 18 January 2018, Justice Hildyard upheld the Gibbs Rule in Bakhshiyeva v Sberbank of Russia & Ors despite explicit calls from the Judicial Commissioner of the Supreme Court of Singapore, Kannan Ramesh (K Ramesh, ‘The Gibbs Principle: A Tether on the Feet of Good Forum Shopping’ (2017) 29 SAcLJ 42, 54), to discard it. The upholding decision has drawn harsh criticism by Judge Martin Glenn most recently in his decision to recognise the Agrokor debt settlement under Chapter 15 in New York. And yet there might be doctrinal as well as policy reasons to rather modernise the Gibbs Rule than simply giving it up.
From a doctrinal perspective, the judges in Singapore and New York may not be sufficiently aware of the very limited scope of the Rule. In a recently published paper, I explain that insolvency proceedings and restructuring proceedings (meaning the discharge of debt by way of settlement) are by no means the same.
Insolvency proceedings are the statutory response to a situation in which a person’s assets fail to cover all claims as they fall due. Here, an orderly and fair solution in the common interest of all stakeholders requires to ring-fence and liquidate the remaining assets to provide for a distribution. Thus, such a procedure is asset-oriented. Its effects on the debtor’s assets should be recognised globally, which calls for a universal procedure governed by the law with the closest connection to the debtor’s assets (not its debts), usually the debtor’s centre of main interests (COMI). Such insolvency proceedings have little connection to the contracts that give rise to the debtor’s liabilities.
Restructuring proceedings are different. They are not conditioned on insolvency in terms of an insufficiency of assets. They may be initiated for insolvent debtors as much as for nearly insolvent or non-insolvent ones. What characterises them is not insolvency, but the fact that a person can convince the majority of his (affected) creditors that a debt settlement (eg, a suspension of payments or a haircut) is in the best interest of all parties. The role of the court is restricted to providing protection for the minority. The result of the process is a contract—concluded either fully consensual (a workout) or court-assisted (a scheme or plan). Such a contract is not closely connected to the place where one of its parties (the debtor) has assets or its COMI. It is not oriented to assets but to debt. It thus attaches to the origin of the restructured debt and should principally be covered by the law governing this debt. This is the essence of the Gibbs Rule.
In addition, there is a policy dimension. Universalism in the form of a global automatic effect of proceedings initiated in one country and governed solely by the law of this country may be conducive to asset preservation. The same need not be true for the effect on globally dispersed debt. Under the UNCITRAL Model Law on Cross-Border Insolvency as much as under the new UNCITRAL Model Law on Insolvency-related Judgements, legislators are allowed to specify grounds to refuse the recognition of a foreign judgment that affects local debt. The resistance of lawmakers against a fully universal approach is persistent. Instead of simply asking them to change their mind, a fresh discussion of specific substantive grounds to recognise—or decline to recognise—a foreign discharge seems appropriate. The Gibbs Rule presents an established starting point as it indicates that foreign creditors are entitled to more than just the right to be heard and voted down in a foreign proceeding.
Stephan Madaus is Professor of Civil Law, Civil Procedure and Insolvency Law at the Martin Luther University Halle-Wittenberg.