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NOT THE RULE INGIBBS – DISCHARGE IN COMPETENT FORUM

Burrows v Jemino (1726): King LC accepted that the plaintiff debtor, discharged by a Leghorn court from liability under a bill of exchange drawn in Leghorn, could not be sued in England. The plaintiff was granted an injunction.

“this cause was to be determined according to the local laws of the place where the bill was negotiated : and the plaintiff’s acceptance of the bill having been vacated, and declared void, by a competent jurisdiction; [King LC] thought that sentence was conclusive, and bound the Court of Chancery here”

Ballantine v Golding (1784): Lord Mansfield extended the rule to bankruptcy. The debtor had undergone bankruptcy proceedings in Ireland, where he was domiciled, and had obtained discharge. He was sued in England on a bill of exchange drawn up in Ireland.

“It is a general principle, that where there is a discharge by the law of one country, it will be a discharge in another.”

Rationale

Prior order was made in competent forum: Clear that Lord Mansfield was stating a proper law-independent principle
Risk of inconsistent orders –Burrows v Jemino - “The Chancellor declared, that if he was to try the cause at law, he would allow the plaintiff the benefit of this matter upon the trial. But as other Judges might be of a different opinion, he would not put the plaintiff upon the difficulty and hazard of a trial.”

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THE RULE IN GIBBS – DISCHARGE OF ENGLISH LAW DEBT ONLY UNDER ENGLISH LAW

Smith v Buchanan (1800): Real source of the Rule (see e.g. Ellis v M’Henry (1871) LR 6 CP 228, 234, per Bovill CJ)

Defendants had previously petitioned for their own bankruptcy under the bankruptcy statute of the State of Maryland, where they lived; had duly executed a deed in favour of their trustee in bankruptcy; and had delivered up their assets to him. In return, the Maryland court had discharged them of their indebtedness. They were subsequently sued in England for payment under an English law-governed contract for goods sold and delivered.
Defendants’ counsel: “it would be inconsistent and unjust to give effect to so much of the law as divests the property out of the bankrupt, and deny him the benefit of the condition on which [their property] was so divested”.
Chief Justice Kenyon rejected this for three main reasons:

English court recognises the trustee’s title to the defendants’ former assets on the basis that “the right to personal property must be governed by the laws of that country where the owner is domiciled”
“impossible to say that a contract made in one country is to be governed by the laws of another”
“how can it be pretended that [creditor] is bound by a condition to which he has given no assent either express or implied?”

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CONFIRMED BY THE HOUSE OF LORDS

Saga of the National Bank of Greece and Athens went up to the House twice:

National Bank of Greece and Athens SA v Metliss [1958] AC 509
Adams v National Bank of Greece SA [1961] AC 255

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ORIGINAL JUSTIFICATIONS

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(1) VESTING OF ASSETS BY FOREIGN BANKRUPTCY ORDER – A

Solomon v Ross (1764)

Creditor C was English creditor of Dutch merchants (debtor D) with apparently English law-governed debt of £5,000
D ceased payment
C sought to attach £1,200 debt owed by DD (D’s debtor) to D
Amsterdam chamber of desolate estates made D bankrupt and appointed curator
D obtained judgment in default and issued a writ of execution against DD, who issued him with a promissory note
Curator’s agent (Solomon) sued DD in England and sought an injunction against C
English court granted the injunction, requiring the stock purchased with the £1,200 to be delivered to Solomon “for the benefit of the creditors of the bankrupts [D], and that C should deliver up the note given by [DD] to be cancelled”

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(1) VESTING OF ASSETS BY FOREIGN BANKRUPTCY ORDER – B

Rubin (2012): Lord Collins approvingly cited Solomon v Ross

“from as early as the mid-18^th century the English courts have recognised the effect of foreign personal bankruptcies declared under the law of the domicile”

In Solomon, the English court appears to have assisted the foreign bankruptcy by transferring an asset which appears to have been an English debt

Law governing DD’s debt to D was unclear but its situs was England (Dicey, Rule 112, repeatedly approved)

This was done notwithstanding prejudice to English creditor (with his judgment in default)

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(2) “IMPOSSIBLE FOR CONTRACT MADE IN ONE COUNTRY TO BE GOVERNED BY THE LAWS OF ANOTHER” – A

Confuses applicable law with forum: Courts may have concurrent jurisdiction irrespective of applicable law; see e.g. the forum non conveniens doctrine.

E.g. Gienar v Meyer (1796): Dutch seamen had signed ship’s articles containing a choice of law and exclusive jurisdiction clause in favour of the law and court of Holland. Napoleonic wars underway. Ship was seized by English warship, brought into port, and eventually sold. Seaman sued master in for wages. Chief Justice Eyre was sympathetic but refused on forum non conveniens grounds:

“Although no persons in this country can by agreement between themselves exclude themselves from the jurisdiction of the king’s courts, and though it must be admitted that contracts are transitory, and that a personal action follows the person, and that the contract in question is of such a nature as to be agreeable to our laws, yet when the parties, who are foreigners, bind themselves in their own country not to sue in any other, and when by suing here they put the Defendant under an intolerable hardship, I think we ought to look into the contract, in order to see what effect it would have, and how it could be enforced in the country where it was made, that we may not do any thing here unjust or contrary to the laws of that country…Then the first thing that stares us in the face is, an agreement that they will not resort to our laws. There is nothing unreasonably in this; the parties are domiciled in Holland, the contract is to perform the whole voyage ending in Holland, and to seek their remedy in their own courts of justice.”

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(2) “IMPOSSIBLE FOR CONTRACT MADE IN ONE COUNTRY TO BE GOVERNED BY THE LAWS OF ANOTHER” – B

2. Confuses proper law of debt with law governing remedies: Court of one country may give or withhold a remedy in relation to debt governed by a different law

Talk of “discharge” is misleading
Real question: Can a creditor given remedy in court of competent jurisdiction ignore that remedy and sue in a different court?

Bankruptcy / winding-up: Rights of proof and payment
Restructuring: “give and take”, not merely surrender or forfeiture

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(3) CREDITOR’S CONSENT (EXPRESS OR IMPLIED)? – A

Rationale is hypothetical consent. As explained in Gibbs (1890) – Lord Esher MR:

“the law of the country, either where the contract is made, or where it is to be performed that it must be considered to be a contract of that country, is the law which governs such contract; not merely with regard to its construction, but also with regard to all the conditions applicable to it as a contract. …The parties are taken to have agreed that the law of such country shall be the law which is applicable to the contract”

Governing law also governs discharge, because this is what the parties are deemed to have agreed

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(3) CREDITOR’S CONSENT (EXPRESS OR IMPLIED)? – B

First, however, why stop there? Why not hypothesise consent to discharge pursuant to another law, such as that of the COMI?
Gibbs (1890) – Lord Esher MR confirms this to be possible:

“The law invoked is not a law of the country to which the contract belongs, or one by which the contracting parties can be taken to have agreed to be bound; it is the law of another country by which they have not agreed to be bound. As Lord Kenyon said, in Smith v Buchanan, it is sought to bind the plaintiffs by a law with which they have nothing to do, and to which they have not given any assent either express or implied”

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(3) CREDITOR’S CONSENT (EXPRESS OR IMPLIED)? – C

Support in the case law: e.g. Atlas Bulk (2012), AWB (2007)
OJSC (2018), per Henderson LJ:

“there may now be a strong case for saying that, in the absence of a stipulation to the contrary, contracting parties should generally be taken to envisage that, upon the supervening insolvency of one party, a single law closely associated with that party should govern the rights of its creditors, wherever in the world its assets happen to be situated, and regardless of the proper law of the contract”

The emphasised words still suggest excessively contractual and therefore bilateral approach to collective proceedings

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(3) CREDITOR’S CONSENT (EXPRESS OR IMPLIED) – D

Second and following from that, creditor consent is plainly antithetical to collective insolvency proceedings, whether bankruptcy / winding-up or restructuring
Third, never a requirement in English bankruptcies

English courts have long accepted the double standard, though without acknowledging the injustice

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(3) CREDITOR’S CONSENT (EXPRESS OR IMPLIED)? – E

Armani v Castrique (1844) – Pollock CB:

“A foreign certificate is no answer to a demand in our Courts; but an English certificate is surely a discharge as against all the world in the English Courts. The goods of the bankrupt all over the world are vested in the assignees; and it would be a manifest injustice to take the property of a bankrupt in a foreign country, and then to allow a foreign creditor to come and sue him here”

Exactly this “manifest injustice” resulted in Smith v Buchanan from non-recognition of foreign discharge of English law-governed debt

Rubin (2012) – Lord Collins

“in the case of corporations the English courts have exercised a winding up jurisdiction which is wider than that which at common law they have accorded to foreign courts” – E.g. w-up of foreign companies with “sufficient connection”

“no necessary connection between the exercise of jurisdiction by the English court and its recognition of the jurisdiction of foreign courts, or its expectation of the recognition of its judgments abroad”

English law also expects recognition of English law restructuring of foreign law obligations in other jurisdictions, e.g. Magyar Telecom

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NEW JUSTIFICATIONS

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(1) ROME I AND II RETAINED: �LEGISLATIVE CONFIRMATION? – A

Rome I and II expressly excludes “questions governed by the law of companies…such as…winding up of companies”

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(1) ROME I AND II RETAINED: �LEGISLATIVE CONFIRMATION? – B

Material scope

Rome I: “to contractual obligations in civil and commercial matters”
Rome II: “to non-contractual obligations in civil and commercial matters”
e.g. In re H (1997), Lord Browne-Wilkinson said “An international Convention, expressed in different languages and intended to apply to a wide range of differing legal systems, cannot be construed differently in different jurisdictions”
“Civil and commercial matters” is a term of art which has autonomous EU meaning

E.g. Case C-29/76 LTU v Eurocontrol ECLI:EU:C:1976:137, para 3

Excludes “‘bankruptcy, proceedings relating to the winding-up of insolvent companies or other legal persons, judicial arrangements, compositions and analogous proceedings”

Repeatedly confirmed by the Court of Justice, e.g. Case C-535/17 NK v BNP Paribas Fortis NV [2019] ECLI:EU:C:2019:96

Similarly, Hague Principles on Choice of Law in International Commercial Contracts exclude insolvency

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(1) ROME I AND II RETAINED: �LEGISLATIVE CONFIRMATION? – C

Rome I also expressly excludes “agreements on the choice of court”
This reinforces the same point

Choice of court agreements are governed by specialist instruments

e.g. Brussels Convention / Regulation and the Hague Conventions

These instruments exclude insolvency, composition, and analogous matters

Part 26A restructuring plan proceedings are judicial compositions in an insolvency context (gategroup)
Part 26 scheme in relation to distressed company is in exactly the same position

Detailed argument in Mokal, “What is an insolvency proceeding?” (2022)

Both are therefore excluded from Rome I

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(2) BENEFITS OF ENGLISH FORUM – A

Argument often made by City of London law firms
The following statement from JonesDay provides a good example:

“there is an alternative view which supports the retention of the Gibbs rule. Creditors enter into English law contracts in order to access the impartiality, commerciality and due process the English courts are well known for. In economies which lack transparent legal systems or significant precedents, the Gibbs rule guarantees to creditors a stable, predictable and trusted legal system which will protect their rights. By ensuring that trusted legal mechanisms underpin agreements, without which credit may be unavailable, the Gibbs rule encourages investment. Further, the fact that Gibbs is good law is factored into the contract price – borrowers benefit from cheaper credit if lenders can rely on English law as being the sole applicable law. If Gibbs were overturned, there is an argument that this would leave lenders across the globe in an uncertain position”

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(2) BENEFITS OF ENGLISH FORUM – B

Argument only holds if recognition is necessary in England.
If not, then, e.g.:

Ruritanian court, the debtor’s COMI court, may amend / discharge English law-governed obligations
Urbanian court, in which debtor’s assets are located, may refuse to permit affected creditors to enforce unamended claims
Gibbs is irrelevant

But why should the English court recognise amendment / discharge of any obligation, irrespective of governing law, which breaches fundamental rules of “impartiality, commerciality, [or] due process”?
Therefore, the argument supports, not Gibbs, but the need for appropriate safeguards on English court’s recognition of any foreign judgment or order

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KEY PROBLEMS

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KEY PROBLEMS

Inefficient restructurings: distressed debtor must open insolvency or restructuring proceedings in England if it needs to restructure English law-governed debt (see recent example: Cimolai SpA and Luigi Cimolai Holding SpA (2023)), even if:

it has no other link with England, and
its stakeholders as a whole would be better off if all of that debtor’s assets and affairs could be dealt with collectively in proceedings in another jurisdiction (such as the debtor’s centre of main interest)
Some such debtors will fail because costs of English – and perhaps parallel – proceedings are too high
Further, even foreign moratorium in aid of foreign restructuring may not apply to English law-governed debt since such debt cannot be restructured in such proceedings; Chang v Cosco Shipping (2021, Court of Session, Outer House)
Finally, some of the problems cannot be resolved by parallel proceedings (Pan Ocean (2014): no disapplication of ipso facto clauses other than as provided for by English law)

Excacerbated inefficiency if other jurisdictions will also follow Gibbs: to stand a test of basic fairness, the design of a cross-border insolvency regime would aspire for all countries to follow the same rule, but then an insolvency process may be broken down into many pieces, resulting in even greater duplication and waste.
Uncertainty: even if we just focus on a single jurisdiction following the rule, if the proceeding takes place in the UK because of the rule in Gibbs, it is not certain that the result can be recognised and enforced elsewhere if the only connection to the UK is the fact that a contract is governed by English law and if the actual centre of main interests of the debtor is elsewhere.
Further inefficiencies (harm to UK plc), foreign debtors driven to London by Gibbs:

Bid up the costs of restructuring services (legal and others)
Take up judicial attention and time on court lists.
This makes it pro tanto more difficult for distressed UK plc to access these courts and services
Some such distressed but viable businesses will be deprived of the opportunity of restructuring their liabilities

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WHO BENEFITS?

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CUI BONO?

First, holdouts amongst English law-governed debt holders who assert the Gibbs rule in the attempt to get themselves a better deal

Distressed debt specialists acquire debt post-distress precisely in order to deploy Gibbs

Second, small group of mostly London-based restructuring professionals who benefit from the Gibbs-driven influx of restructuring business

However, plenty of debtors seeking to restructure originally non-English law debt make the effort to restructure in English courts

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INTERNATIONAL INSTRUMENTS AND NORMS

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UNCITRAL MODEL LAWS ON INSOLVENCY

Model Laws on:

Cross-Border Insolvency
Groups
Insolvency-derived Judgments and Orders

Gibbs Rule is ”increasingly anachronistic in a world where the principle of modified universalism has been the inspiration for much cross-border cooperation in insolvency matters, including the UNCITRAL Model Law”, per Henderson LJ in OJSC

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MODIFIED UNIVERSALISM AS EMERGENT NORM OF CUSTOMARY INTERNATIONAL LAW

Instruments above show widespread adoption by important intergovernmental organisation with responsibility for identifying and crystallising ‘best practice’ standards (see also Mevorach, ‘Modified Universalism as Customary International Law’ (2018) Texas Law Rev)
Lord Collins in Rubin

“there has been a trend, but only a trend, to…‘modified universalism’”

Lord Sumption in Singularis (2014)

“the principle of modified universalism is part of the common law, but…it is subject to local law and local public policy and…the court can only ever act within the limits of its own statutory and common law powers”

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BETTER APPROACHES

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APPROACH TAKEN IN OTHER JURISDICTIONS

Pacific Andes (2016) [Singapore]

Additional rule by which parties to a contractual relationship governed by the law of a jurisdiction adhering to the rule and reasoning in Gibbs would be attributed with the expectation that their claims might be discharged in proceedings in a jurisdiction with which the debtor has an established connexion of residence or business

Modern Land (2022) [United States]

Chapter 15 recognition acts to validly discharge New York law-governed debt: “This argument relies on the Agrokor case, where this Court enforced the modification of both English law and New York law-governed debts pursuant to a Croatian insolvency proceeding, even though jurisdictions following the Gibbs Rule may not have treated the modification of English law-governed debts as effective”

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APPROACH TAKEN IN ENGLAND IN RELATION TO BANK OBLIGATIONS – A

Sections 89H-89I of the Banking Act 2009

Authorise Bank of England, with Treasury’s approval, to recognise (or not) action or part of action taken by foreign resolution authority
Such actions may include bail-in of English law-governed debt forming part of foreign bank’s regulatory capital

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APPROACH TAKEN IN ENGLAND IN RELATION TO BANK OBLIGATIONS – B

Sections 89H-89I of the Banking Act 2009

Recognition may only be refused on limited number of grounds:

Adverse effect on UK financial stability
Material fiscal implications for the UK
UK action needed in relation to UK branch
Foreign action discriminates against UK-based creditors
Recognition would be contrary to ECHR Art 6 (fair hearing)

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APPROACH TAKEN IN ENGLAND IN RELATION TO BANK OBLIGATIONS – C

Sections 89H-89I of the Banking Act 2009

Recognition given foreign action the same legal effect in any part of the UK as it would have produced had it been made with due authority under the law of that part of the UK
This would plainly override Gibbs

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APPROACH TAKEN IN ENGLAND IN RELATION TO BANK OBLIGATIONS – D

Sections 89H-89I of the Banking Act 2009

Recognition given foreign action the same legal effect in any part of the UK as it would have produced had it been made with due authority under the law of that part of the UK
This would plainly override Gibbs. See e.g.:

Joint Administrators of Heritable Bank v Winding up Board of Landsbanki Islands hf (2013), per Lord Hope
Goldman Sachs (2018), per Lord Sumption

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WAY FORWARD �JURISDICTION – ENFORCEMENT - SAFEGUARDS

Adopt Article X, supplemented as follows
Foreign modification discharge should be recognised/enforced if:

Foreign court had:

Competence in relation to debtor: in personam jurisdiction over debtor
subject matter jurisdiction in relation to insolvency

In relation to creditors, proceeding had following features:

Due process: Proper notification, rights of participation, non-discrimination
Prima facie substantive fairness, in particular, prima facie fair quid pro quo

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