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Foreign Restructurings and English Law Debts: the Limits to Cross-Border Assistance

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Foreign Restructurings and English Law Debts: the Limits to Cross-Border Assistance FOREIGN RESTRUCTURINGS THE AND ASSISTANCE CROSS-BORDER LIMITS DEBTS: ENGLISH LAW TO KEY POINTS Where a foreign restructuring process discharges a debt, the creditor may still be able to Feature enforce its debt in England where the debt is governed by English law. The Cross-Border Insolvency Regulations (CBIR) cannot be used to provide an indefinite stay that would abrogate creditors’ substantive rights under English law. The CBIR is intended to provide a temporary stay to give debtors a breathing-space while they formulate a restructuring. Where a debtor wishes to bind dissenting English creditors to a foreign restructuring, it will need to promulgate a parallel scheme of arrangement in England. The CBIR set out what are primarily procedural powers that are not intended to interfere with substantive English law rights. Authors Simon Camilleri and Fred Hobson Foreign restructurings and English law debts: the limits to cross-border assistance The recent Court of Appeal decision in Re OJSC International Bank of Azerbaijan gave plan, as a matter of Azeri law, was to cancel rise to the issue of whether a debtor could obtain a permanent stay under the Cross- the bank’s existing indebtedness and in its Border Insolvency Regulations (CBIR) to bind a creditor, whose debt was governed place provide creditors with an entitlement to by English law, to a foreign restructuring. The court refused to grant a stay in take up new debt instruments. circumstances where this would circumvent creditors’ substantive English law rights. In November 2017, IBA’s foreign This article explores the effect of the decision and in particular the tension between representative returned to the English court ensuring the effectiveness of a foreign restructuring and protecting the rights of seeking an order under CBIR Art 21 for a creditors whose debt obligations are governed by English law. Permission has now permanent moratorium on creditors’ claims, been sought to appeal this decision to the Supreme Court. ie a stay that would continue indefinitely beyond the termination of the restructuring proceeding. The application was resisted INTRODUCTION a stay is strictly limited, in temporal terms, to by two creditors of IBA whose debts were The case of Re OJSC International the life of the restructuring proceeding itself. governed by English law, Sberbank and ■Bank of Azerbaijan [2018] EWCA Civ Both conclusions are likely to be welcomed Franklin Templeton (the English creditors). 2802 arises out of the financial difficulties by creditors. By a judgment dated 18 January 2018, experienced by Azerbaijan’s largest bank, Hildyard J refused IBA’s application, the International Bank of Azerbaijan BACKGROUND holding that the court had no jurisdiction (IBA), in 2017. As a result of these financial IBA is an Azeri bank. It fell into financial under CBIR Art 21 to grant the indefinite difficulties, IBA entered into a restructuring difficulties in 2017. In April 2017, it embarked stay sought (Re OJSC International Bank of process to which a number of IBA’s creditors on a voluntary restructuring proceeding Azerbaijan [2018] 4 All E.R. 964). The judge assented. A minority did not. The legal issues in Azerbaijan with a view to restructuring granted permission to appeal. which arose concerned the extent to which certain of its foreign debts. This was a rescue those dissenting creditors, where their debt procedure, akin to administration or a US THE GIBBS RULE obligations were governed by English law, Chapter 11 proceeding, designed to restore Central to the issues in these proceedings could continue to enforce claims against IBA the bank to financial health. is the Gibbs rule, which takes its name from in England. The Court of Appeal’s decision In May 2017, IBA’s foreign representative an 1890 Court of Appeal decision (Antony confirms that the Cross Border Insolvency applied to the English court for an order to Gibbs & Sons v La Société Industrielle et Regulations 2006 (CBIR) do not act as a recognise the Azeri restructuring proceeding Commerciale des Métaux (1890) LR 25 QBD bar to enforcement, on two levels. First, as a foreign main proceeding under the 399). The effect of the rule is that, as a matter the Court of Appeal has confirmed that CBIR. This was granted by Barling J in of English law, any discharge of or variation the relevant powers under the CBIR could June 2017 together with a temporary stay of to a contractual obligation is governed by not properly be exercised to circumvent creditors’ claims under CBIR Art 20 which the proper law of the contract. Therefore, the English creditors’ substantive rights. was intended to give IBA a breathing-space whatever the position as a matter of Azeri Second, the court confirmed that there is no pending its restructuring plan taking effect. law, as a matter of English law the rights of power under the CBIR to grant a permanent IBA’s restructuring plan was approved by the English creditors (ie creditors whose debt or indefinite stay in support of a foreign a majority of creditors and sanctioned by the obligations are governed by English law) were restructuring proceeding: the power to order Azeri court in August 2017. The effect of the unaffected by the Azeri plan. (There is an Butterworths Journal of International Banking and Financial Law March 2019 167 Biog box Feature Simon Camilleri is an associate of the firm Fried, Frank, Harris, Shriver & Jacobson (London) LLP, practising in commercial and company law. Email: [email protected] exception where a creditor participates in the Proceedings (Council Regulation (EC) of proceedings. However, where the debtor’s restructuring or submits to the jurisdiction 1346/2000), the CBIR contains no COMI is outside the EU and the creditor of the foreign court, as to which see Rubin choice of law provisions; nor, indeed, has not submitted to the foreign process, the v Eurofinance SA [2013] 1 AC 236 at [167], does it contain any form of reciprocity issue that a debtor in IBA’s position faces but that did not apply in this case). It was requirement. If Art 21 had been intended is that, because of the Gibbs rule, a creditor common ground between IBA and the to override the substantive rights of whose debt is governed by English law will English creditors that the Gibbs rule was creditors under the proper law governing remain free to bring proceedings in England binding on the Court of Appeal. their debts, Art 21 would have said so to enforce its debt. explicitly. It would be wrong to use There is an established way around THE CORE ISSUE ON APPEAL Art 21 in a way that is tantamount to the this issue, which is for the foreign debtor The purpose of IBA’s application was to application of Azeri law (see paras 86-95 to promote a parallel English scheme of prevent the English creditors from enforcing of the judgment). arrangement so as to bind English creditors their claims against IBA and thereby, so it Second, the court held that, in any (see for example Re Drax Holdings [2004] 1 was said, obtaining an unfair advantage over event, there was no power for a stay to WLR 1049). That is not a course that IBA the other creditors whose original debts had be granted on an indefinite basis that took. IBA sought instead to use the power been discharged under the plan. would last beyond the termination to grant a stay under CBIR Art 21 as a Article 21 of the CBIR provides, on the of the foreign proceeding. The main means to align the position of the dissenting face of it, a broad power available to the object of the relevant Art 21 powers English creditors with the Azeri plan. The English court to grant any appropriate relief, was to provide a temporary “breathing Court of Appeal’s rejection of that approach including a stay of creditors’ claims, following space” to debtors while they formulate underlines the importance of a foreign the recognition of a foreign proceeding. a restructuring. However, the Azeri debtor promulgating a parallel scheme of The critical question was whether there plan had come into effect and the bank arrangement where it wishes to bind English was power under CBIR Art 21 to grant restored to financial health – whilst creditors who would otherwise be free to an indefinite stay of creditors’ claims in the proceeding (as accepted by IBA) adopt a “hold out” position in reliance on circumstances where to do so: was being kept alive artificially for the their English law rights. would interfere substantively with the purpose of the appeal, it had as a matter The Court of Appeal’s decision will English creditors’ rights; and of substance run its course (see paras 96- be welcome to English creditors who hold would prolong the stay beyond the date 101 of the judgment). distressed debt in circumstances where the on which the Azeri reconstruction had debtor’s COMI is outside the EU. Where the come to an end. ANALYSIS debtor is subject to a foreign restructuring FOREIGN RESTRUCTURINGS THE AND ASSISTANCE CROSS-BORDER LIMITS DEBTS: ENGLISH LAW TO There are two practical issues that underlie process, the court has held that the dissenting THE COURT OF APPEAL’S REASONING the case. The first is how a foreign debtor such English creditors’ substantive rights cannot In a judgment handed down in December as IBA is able to bind a dissenting creditor be undermined by means of a procedural 2018, the Court of Appeal dismissed IBA’s to a restructuring plan, where that creditor’s power under the CBIR. The court’s decision appeal, thereby upholding the decision of debt is governed by English law.1 The second therefore serves an important protection of Hildyard J that there was no power under is the temporal question: how long can any English creditors.
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