1. Introduction
This article is concerned with a rule of English private international law, found in Dicey, Morris & Collins on the Conflict of Laws, that ‘[a] discharge from any debt or liability under the bankruptcy law of a foreign country outside the United Kingdom is a discharge from that debt or liability if, and only if, it is a discharge under the law applicable to the contract’.Footnote 1 In the nineteenth century case of Antony Gibbs & Sons,Footnote 2 a party to a contract governed by English law was not discharged from liability under that contract in England, even though it had been discharged from liability in a French liquidation. Thus, this rule of English private international law is often referred to by the shorthand of the ‘rule in Gibbs’. At first sight, Gibbs might appear an intensely technical rule, of interest only to a narrow group of perspicacious insolvency and restructuring lawyers. As will be seen, however, the rule is of much wider interest. This article seeks to speak across conventional dividing lines between corporate insolvency and restructuring lawyers and contract law, property law, conflicts of laws and European Union (EU) law specialists, setting the rule in Gibbs in a wider context.
The rule is already enormously controversial in international corporate insolvency law scholarship and practice. Critics consider that the rule undermines the very foundation of corporate insolvency as a unitary process in which individual collection efforts are replaced by a collective proceeding for all creditors.Footnote 3 The distributive fairness of the proceeding is fatally undermined if creditors can simply contract out of the effects of the insolvency proceeding by selecting a different choice of law to govern their contract. The rule in Gibbs also gives rise to concerns for cost and speed (because multiple proceedings may need to be opened to handle liabilities governed by different laws) and concerns for creditor wealth maximisation (because multiple proceedings may make it harder to keep the insolvent estate together, leading to less value-maximising outcomes). For opponents of the rule, it is the law of the State of the opening of insolvency proceedings that should govern discharge, not the law of the contract.
England’s refusal to acknowledge this is said to be a straightforward example of parochialism and territorialism. The rule, it has been argued, ‘belongs to an age of Anglocentric reasoning which should be consigned to history’.Footnote 4 By stubbornly sticking to the rule in Gibbs, English practitioners ensure that English law-governed debt contracts can only be restructured using English procedures, virtually guaranteeing their pipeline of work. For critics, this is blatant self-interest, and it is utterly indefensible.Footnote 5 And the constraints that the rule imposes prevent so-called ‘good forum shopping’ in which beneficial results can be achieved for both debtors and creditors by engaging advantages that restructuring procedures in a foreign jurisdiction may offer over the restructuring procedure(s) available in the place of the contract.Footnote 6 The debate has been heightened by Britain’s departure from the EU. England’s practitioners could be seen to be fighting a rear-guard action to protect their cross-border insolvency work in an increasingly competitive, post-Brexit environment. In the meantime, the courts show no appetite to enter the fray. In the eyes of the judiciary, the question of whether the rule in Gibbs should be abolished or not is a straightforward question of policy, and the decision is for Parliament. The last United Kingdom (UK) Government, anxious that England not be regarded as pulling up its drawbridge and retreating from international cooperation, worried that perhaps the time had come to abolish the rule. The new UK Government will undoubtedly revisit the question in due course.
This article takes a nuanced position. The core argument is that there is a strong and principled defence of the rule in Gibbs where a debt is discharged in a corporate restructuring. Different considerations apply, however, where a debt is discharged after a sale of a bankrupt firm’s assets to a third party and distribution of the proceeds of sale among its creditors. To understand the argument, it makes sense to start with why the rule in Gibbs may no longer be the appropriate rule for the twenty-first century in an insolvency sale and distribution, before analysing why restructuring may be different.
2. The rule in Gibbs in the context of an insolvency sale and distribution
In a ‘traditional’ insolvency proceeding, the debtor’s business or assets are sold to one or more third parties and the proceeds of sale distributed to its creditors in accordance with a statutorily mandated distributional order of priority. A fundamental objection to the rule in Gibbs—that creditors should not be able to contract out of the mandatory consequences of insolvency law merely by selecting a different law to govern their contract—has salience here. Insolvency is ‘inherently a unitary mechanism’.Footnote 7 The concern is that a creditor who ranks low in the distributional order of priority in the insolvency proceedings, and who thus stands to make little or no recovery in them, should not be able to improve their position by relying on distributive and other rules in the place of the governing law. Fundamentally, the argument is that one creditor should not be able to gain a priority advantage over others simply by strategic selection of the governing law of the contract.
At the same time, large suppliers to a business in a specific jurisdiction may only be willing to supply if the contract is governed by laws with which they are familiar, and lenders may only be willing to lend if the finance documents are governed by laws in which they have confidence or, at least, may only be willing to lend at a favourable price on this condition. Smaller suppliers and lenders may lack the resources to investigate laws that they are not familiar with, while a requirement to investigate multiple laws will increase transaction costs for everyone. Furthermore, a supplier or lender may expect to have recourse to assets within a specific jurisdiction and may not be in any position to assess their credit position if rights in those assets are determined by the laws of a different regime. Finally, a country’s insolvency law is likely to adopt a specific policy position on tools that protect creditors against default, among other things, to avoid the risk of a ripple of failure. Undermining the creditor’s ability to rely on these tools in a cross-border context may undermine that objective within the specific jurisdiction.Footnote 8
The European Insolvency Regulation (EIR) establishes rules to determine which courts in the EU have authority to open insolvency proceedings, the scope of those insolvency proceedings, which laws govern the issues that arise within them and when judgments handed down in the proceedings are to be recognised and enforced in other European Member States.Footnote 9 These rules seek to balance the benefits for the debtor of a single law governing all aspects of its insolvency case with the creditor concerns that have been touched on. The EIR provides for the opening of main proceedings in the jurisdiction where the debtor has its centre of main interests (COMI),Footnote 10 and the potential for secondary proceedings to be opened in any other jurisdiction where the debtor has an establishment.Footnote 11 It regulates the relationship between main and secondary proceedings by providing that secondary proceedings are limited to the debtor’s assets in the jurisdiction in which the secondary proceedings are opened.Footnote 12 Furthermore, it contains a complex set of choice of law rules that determine when a law other than the law of the State of opening of the proceedings governs issues in the case. For example, Article 8 EIR provides that where a secured creditor or third party has a right in rem recognised by local law over assets situated in a Member State where neither main nor secondary proceedings have been opened, those rights are not affected by the opening of insolvency proceedings. Recital (68) EIR explicitly recognises the importance of security rights for the granting of credit and acknowledges the usual rule in private international law that it is the lex situs of the asset that determines the recognition of the security interest. Article 9 provides that set off will be unaffected by the opening of proceedings where it would be recognised under the law applicable to the debtor’s claim against the creditor; Article 10 provides protection for a seller’s rights based on reservation of title; and Article 16 contains some important protections in the context of transaction avoidance proceedings.Footnote 13
The difficulty is that the UK has left the EU and therefore no longer benefits from the EIR. It has enacted the Cross-Border Insolvency Regulations 2006 (CBIR), which implement the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency (MLCBI)Footnote 14 in the UK. In the Supreme Court case of Rubin, Lord Collins controversially found that the CBIR is not fundamentally a regime for the recognition and enforcement of judgments.Footnote 15 If this is right then, unlike the EIR, the CBIR does not interfere with the rule in Gibbs. In the context of a sale of assets and distribution of proceeds in a foreign insolvency proceeding, this is most likely to be of concern where there are also assets in the UK. If there are no assets in the jurisdiction, the creditor will achieve little by challenging discharge of liability in foreign insolvency proceedings in the English courts. If there are assets in England, then the effect of Gibbs may be that a debt that is discharged in the foreign proceedings can be enforced against them as a matter of English law, with all the concerns for priority improvement by contract that have already been explored.
Lord Collins’ claim that the CBIR is narrower than the EIR can be unpacked by putting the two regimes into conversation with each other. Broad strokes will suffice. If a foreign main proceedingFootnote 16 is recognised under the CBIR, a relatively limited automatic stay comes into force (suspending certain creditors’ freedom to enforce their rights, although not destroying those rights).Footnote 17 The court can then grant discretionary relief.Footnote 18 Discretionary relief can include broadening the scope of the automatic stay,Footnote 19 and can also be granted in respect of foreign non-main proceedings.Footnote 20 And in granting or denying relief, the court must be satisfied that ‘the interests of the creditors (including any secured creditors or parties to hire-purchase agreements) and other interested persons, including if appropriate the debtor, are adequately protected’.Footnote 21 Other than a limited public policy exception, however, this is just about as far as the guidance goes.Footnote 22 There is no regime for putting boundaries around the scope of foreign main or non-main proceedings of the type found in the EIR. And fundamental questions about when the law of the place of opening of insolvency proceedings should be mandatorily engaged, and when another law should govern disputes, are not clearly asked or answered in the CBIR. Given the considerably more limited nature of the CBIR when compared with the EIR, it is not surprising that the English courts have declined to overrule Gibbs in cross-border corporate insolvency law cases on the strength of the CBIR regime alone.
The new UNCITRAL Model Law on Recognition and Enforcement of Insolvency-Related Judgments (MLIJ) is in part a response to Lord Collins’ interpretation of the CBIR in Rubin,Footnote 23 but goes no further in addressing complex questions about the relationship between different insolvency proceedings in different jurisdictions for a single company, or about choice of law.Footnote 24 Indeed, in some ways that will be touched on in passing in Section 7.1, it is even less developed than the MLCBI, so that it is perhaps unsurprising that at the time of writing no jurisdiction has adopted it.Footnote 25 UNCITRAL’s Working Group V, which works on insolvency law, is currently assessing at a more granular level the applicable law in cross-border insolvency proceedings.Footnote 26 The right time to reconsider abolition of the rule in Gibbs in the context of insolvency sales and distributions is when these deliberations have concluded, the UK has had a chance to evaluate the result and UNCITRAL has given more thought to the scope of foreign main and non-main proceedings and the relationship between the two.
This brings us to a second question—to what extent should the rule in Gibbs apply where debt is discharged in a restructuring procedure? Recognition of the discharge of a debt is of wider importance in a restructuring context, because the objective in a corporate restructuring is for the company to trade on. Nuisance litigation may hold up the company’s business or cause counterparties or future investors to worry about the impact of the proceedings. This means that an effective discharge of any liabilities in other jurisdictions may be essential, even if the debtor does not have any assets in the jurisdiction. And yet, as will be seen, there are good reasons to argue that the rule in Gibbs should apply in a restructuring case, even if UNCITRAL Working Group V introduces new choice of law rules into the UNCITRAL Model Laws and questions of scope are addressed. To analyse this argument, it is necessary to start with a foundational question: what is a restructuring procedure?
3. What is a restructuring procedure?
Thomas Jackson, using the United States (US) term ‘reorganization’, famously conceived of restructuring as an insolvent sale and a distribution of the proceeds, writing that ‘[a] reorganization, at least as a start, may be viewed as a form of liquidation. The business entity, however, is sold to the creditors themselves rather than to third parties’.Footnote 27 The point is put even more expansively in an essay written as the introductory chapter for an important volume on corporate insolvency law theory:
[r]eorganization is effectively a “hypothetical sale” of a firm to its creditors. Instead of selling to third parties for cash or securities, the reorganization process sells the firm to existing creditors, who exchange old claims for new interests (debt or equity) in the reorganized firm.Footnote 28
When corporate restructuring is viewed through this lens, it is also, as Jay Westbrook would put it, ‘inherently a unitary mechanism’ because the assets of the firm are realised and all creditors swap their individual claims for a claim in the proceeds, depending on their insolvency priority.Footnote 29 To some extent, theory follows practice on this point in Chapter 11 of the US Code (Bankruptcy Code). Creditors and shareholders are divided into classes to vote on a Chapter 11 plan according to their statutorily prescribed ranking in Chapter 11’s distributional order of priority. The court may confirm a Chapter 11 plan where a statutorily prescribed majority approves it in each voting class. If the majority is not achieved in a class, the court can still confirm the plan provided it does not ‘unfairly discriminate’ and is ‘fair and equitable’.Footnote 30 The Bankruptcy Code offers no definition of ‘unfair discrimination’ but it is generally interpreted to mean that the dissenting class must receive value under the plan roughly equivalent to that received by other similarly situated classes (a rule of horizontal equity).Footnote 31 The requirement for the plan to meet the ‘fair and equitable’ standard is codified in section 1129(b), and is colloquially known as the absolute priority rule (APR). Essentially, the APR requires that no junior class recover until a more senior class has recovered in full, and that the senior class does not recover more than full compensation for its claims and interests (a rule of vertical equity).Footnote 32 In practice, an enterprise value is determined for the firm and distributed down the creditor waterfall in accordance with the Bankruptcy Code’s distributional order of priority to test the fairness of the plan.Footnote 33 In other words, the ‘purchase price’ (the enterprise value of the firm) is distributed among the creditors in accordance with their insolvency priority rights.
Recall, however, that Jackson suggested that ‘at least as a start’ a reorganisation may be viewed as a form of liquidation.Footnote 34 This is because, once we move beyond a superficial comparison, the analogy becomes somewhat strained. First, in an insolvent sale and distribution, a third-party purchaser assumes the control rights consistent with ownership of the firm, and the right to benefit from any future upside generated after the purchase. Ordinarily, all creditors of the firm crystallise their position on the sale, and even on the relatively rare occasions in which some creditors receive consideration in the form of a contingent interest in the purchaser or future value, those creditors are unlikely to retain any control rights in the restructured firm. In a restructuring transaction, on the other hand, it is entirely usual for some of the creditors to retain control rights against the firm and to have the ability to improve their recoveries if the firm returns to profitability. However, only some creditors benefit in this way—others crystallise their loss at the point of the transaction. This is because the APR has the result that once the enterprise value has been exhausted, creditors who have yet to receive an allocation will not be entitled to insist on a recovery and have no post-restructuring relationship with the firm. Those above them in the distributional waterfall, on the other hand, are likely to retain a relationship with the post-restructuring debtor and the right to greater recovery if the firm does return to profitability. Second, beyond the APR, the details of the plan may produce radically different results among creditors, even among those with the same type of claim. Some contractual counterparties may find that their contract is repudiated while others find that defaults under their contracts are cured and their relationship with the company continues.Footnote 35 Some landlords may find that their unexpired leases are honoured in full while others may find their leases effectively surrendered.Footnote 36 This is very far from the unitary nature of a ‘traditional’ insolvency sale of the business or assets and distribution of the proceeds, where all creditors are treated in the same way, swapping their individual right to demand repayment of their debt for an interest in the proceeds of sale.
Against this backdrop, some US scholars have suggested different analytical frames for the Chapter 11 reorganisation process. Antony Casey has argued that Chapter 11 is better viewed as a framework for renegotiation—what he calls the ‘new bargaining theory’ of Chapter 11.Footnote 37 In Casey’s work, a restructuring is squarely about reaching a new bargain between the debtor and its creditors rather than a quasi-enforcement sale of assets and distribution of proceeds. Stuart Gilson has similarly described restructuring as the process of ‘recontracting’.Footnote 38 Casey and Gilson’s analyses can be explained by the fact that the real-world consequence of the fair and equitable and no unfair discrimination rules is that the uncertainty of judicial determination drives bargaining (recall that these rules are only engaged if a consensual deal cannot be achieved).Footnote 39 In this account, Chapter 11 creates ‘suitable conditions for the negotiation of a fair and efficient settlement’.Footnote 40 In other words, while the hypothetical sale may provide a descriptive account of the rules, it does not accurately describe the entirety of Chapter 11’s restructuring procedure.
In a similar vein, Stephan Madaus has argued in a European context, that a restructuring agreement is the result of restructuring proceedings that aim ‘at facilitating the conclusion of a contract’ and should thus be governed by contract (and company) law rules and principles.Footnote 41 Madaus provides a carefully constructed argument to support his conclusion. He draws a distinction between a classic liquidation sale as a ‘day of reckoning’ in which assets are realised and losses are allocated, and a restructuring in which creditors can benefit from the future value of the firm.Footnote 42 He places this in a theoretical frame distinguishing liquidation from restructuring. For Madaus, this difference requires a ‘different handling’ of restructuring from liquidation.Footnote 43 Restructurings are also likely to implicate a far wider range of possibilities than a liquidation sale, requiring complex negotiations and, frequently, complex restructuring agreements. Restructurings, then, ‘deserve their own legal domain outside of insolvency law’.Footnote 44 Ultimately, this leads Madaus to conclude that ‘it seems preferable to exclude the recognition of any restructuring plan from the scope of international insolvency law in favour of private international law rules on the recognition of foreign contracts’.Footnote 45
Although his position is not entirely clear, Madaus appears to conceive of provisions in restructuring law that enable a plan to be approved where the statutory majority has not been achieved in a class in a different way. For the most part, his article is concerned with restructuring law that enables a restructuring plan to be imposed on a minority of creditors within a class where the statutory majority in the class has voted to support it. Both Chapter 11 ‘consensual’ plans,Footnote 46 and UK Part 26 schemes of arrangement,Footnote 47 in which the statutory majority must be achieved in every voting class, fall within this description. Consensual Chapter 11 plans and the UK Part 26 scheme of arrangement contrast with Chapter 11 plans where the non-consensual rules are engaged, and with the relatively new UK Part 26A restructuring plan procedure. In both these procedures, the court has jurisdiction to sanction the plan even if an entire class or classes of creditor have dissented, provided certain conditions are met (a cross-class cramdown power).Footnote 48
Cross-class cramdown receives relatively brief treatment in Madaus’ work, so that it is worth setting out his argument at some length for the purposes of this article:
Even where legislators are willing to impose a restructuring plan against the vote of a majority of stakeholders through a court order, the contractual approach would neither support nor inhibit such a legislative move. The approach would point out, however, that such a cramdown option finds its legitimate base only in the court order, not in ideas of a contract, party autonomy or a market decision. It would also stress that, while such a court-centered approach can actually prevent a tragedy of the anticommons by installing a sole decision-maker, the decision how to use the common good would not rest with the owners anymore.Footnote 49
It is not entirely easy to reconcile this passage with Madaus’ treatment of court-supervised restructurings more generally. After all, where a plan is crammed down on a minority within a class the contract would typically require unanimous, or near-unanimous, support. Debtors resort to restructuring law’s procedures to benefit from lower thresholds of consent than those required under the relevant contracts. It is true that both restructuring law and contract law are centrally concerned with facilitating bargaining. In a restructuring, however, the court presides over a plan that coercively adjusts or alters the terms originally agreed by the parties in a way that sits uncomfortably with our conception of contract law.Footnote 50 A different, but relevant, question is identified by Horst Eidenmüller: whether the parties should be free to determine in their original contract the rules of the game that will become the reference point for any restructuring renegotiation in distress.Footnote 51 Eidenmüller does not quite put the point in this way but this is the substance of his claim.
Eidenmüller distinguishes between what he calls ‘fully collective’ insolvency proceedings and proceedings that only affect certain creditors or groups of creditors. He distinguishes between an insolvency responding to the common pool problem and a restructuring designed to ‘bring about an early financial restructuring of portions of creditors’ claims’.Footnote 52 He concludes that ‘[n]obody has to accept that his or her claim shall be reduced in a forum different from that which was contractually agreed or would be available under the non-insolvency rules of the applicable international civil procedure regime’.Footnote 53 Eidenmüller’s argument is that if only some of the creditors are being compromised, while others ride through the case unimpaired, the justification for overriding the governing law of the contract in favour of a collective proceeding does not apply. This distinction reflects, to some extent, the distinction that this author and co-author Adrian Walters have drawn between ‘selective’ and fully inclusive proceedings.Footnote 54 This work shows that modern market participants often seek to compromise only selected liabilities of the firm and not all its liabilities. It also, however, highlights some challenges with Eidenmüller’s boundaries.
In Eidenmüller’s work, Chapter 11 always falls on the ‘fully collective’ side of the line. It is indeed the case that Chapter 11 is formally all-encompassing—all claims must be dealt with in some way in the plan.Footnote 55 This contrasts with UK and European procedures which more readily facilitate plans targeting certain creditors.Footnote 56 However, as this author and Walters show, practitioners have found many ways to work around the inclusive nature of Chapter 11 so that, in reality, most Chapter 11 restructuring cases only target specific creditors.Footnote 57 Thus, the question of division between collective and selective proceedings is fraught with difficulty, and Eidenmüller’s division between collective and selective proceedings is problematic. Moreover, Eidenmüller’s boundary does not reflect the wider concerns revealed in this article—that even in an inclusive Chapter 11 plan of reorganisation some creditors crystallise a loss while other creditors retain control rights in the firm and the chance to benefit from potential future upside, and that different creditors with similar pre-bankruptcy rights may receive radically different treatment from each other in the plan, so that we must question whether a restructuring is a ‘unitary mechanism’Footnote 58 at all.
Thus, the claim in this article is more fundamental—that restructuring transactions are, subject to one caveat, different from a ‘unitary’ insolvency proceeding in which all creditors swap their right to demand payment for a right in the proceeds of sale, subject only to their different priority positions.Footnote 59 Restructurings are a process of renegotiation, either through private bargaining or court order, in which some creditors will be able to benefit from the future trading of the firm on new terms and where different creditors may be subject to different treatment in the plan, even if they would rank equally in an insolvency sale and distribution.Footnote 60 This does not require the equating of a restructuring squarely with contract law, or the drawing of divisions between fully inclusive or selective corporate restructurings. The boundary drawn here is between insolvent sales of businesses or assets to third parties and distribution of the proceeds to creditors, and restructurings of liabilities within the corporate shell. This article can now turn to the implications of this claim for the rule in Gibbs.
4. Implications for the rule in Gibbs in the context of corporate restructuring
In an important modern case following Gibbs, Hildyard J stated:
the proposition for which the Antony Gibbs case stands would be considered entirely obvious by a contract lawyer characterising the question as a contractual one (as to the law applicable to the variation or discharge of a contract) and applying ordinary conflict of law principles.Footnote 61
This is, of course, because a contract lawyer would expect the governing law of the contract to determine questions of discharge. All corporate insolvency law interferes, to some extent, with freedom of contract. Thus, the question is whether it is justifiable to interfere with that result in the context of a debt restructuring. The careful reader will already guess the argument advanced here. If debt restructuring is not a unitary proceeding in which all creditors are subject to the same mandatory regime to determine their rights and interests but instead requires renegotiation in distress with different treatment of different affected creditors, then the parties should be free to select the rules that will be the reference point for such bargaining. In short, the rule in Gibbs is not only defensible—it is the ‘right’ rule.
A practical orientation reinforces the point. As has already been seen, the law governing the contract is not primordial—in commercial debt finance it is typically chosen by the debtor and the counterparty.Footnote 62 That is why it is called the ‘choice of law’. The reasons why that choice was made cannot simply be ignored in determining the correct approach to cross-border recognition in corporate insolvency law. To understand this, it is necessary to understand the factors motivating the original selection in more detail.
Philip Wood has explored a range of factors that help us to determine why one governing law may be chosen over another in international business transactions.Footnote 63 He compellingly demonstrates that a borrower under a loan agreement or the issuer of a bond may choose a governing law for the debt contract that is different from the jurisdiction in which the borrower is incorporated and/or conducts most of its business. The list of main areas of risk is long: predictability; insulation of the contract from ‘interfering’ foreign laws; business orientation of the legal system; freedom of contract; exclusion clauses and mis-selling liability; insolvency law; insolvency set-off; security interests; trusts; corporate law indicators and risks; courts, litigation, and arbitration; regulatory law; and general non-legal features.Footnote 64 The important point is that the debtor, issuer or contractual counterparty had good reasons for selecting, or agreeing to, the governing law that they did. In many cases, the choice will have influenced either the willingness of the counterparty to contract or the price at which they were willing to do so. As was seen in the context of an insolvency sale and distribution, a supplier to the business in a specific jurisdiction may only be willing to supply at all if the contract is governed by laws with which they are familiar. A lender may only be willing to lend, or may reduce their pricing, if the loan agreement is governed by the laws in which they have confidence. This is relevant to this article’s inquiry in important ways.
First, the company has had the benefit of better availability of, or lower cost in, contracting because of its ability to select the governing law, so that there must be a question as to whether it is legitimate to prevent the creditor from demanding that that law will also govern a renegotiation of the contract. As has already been touched on, all corporate insolvency law interferes with the legitimate contractual expectations of creditors to some extent. It might, therefore, be argued that the creditor ought to be able to foresee that a restructuring will be governed by a law other than the governing law of the contract. Indeed, it was for this reason that the Singapore court rejected the Gibbs principle in Pacific Andes Resources Development Ltd, where creditors argued that the Singapore court could not assert jurisdiction over their claims because the relevant contracts were governed by Hong Kong law. The court endorsed Professor Ian Fletchers’ view that:
if one of the parties to the contract is the subject of insolvency proceedings in a jurisdiction with which he has an established connection based on residence or ties of business, it should be recognised that the possibility of such proceedings must enter into the parties’ reasonable expectations in entering their relationship, and as such may furnish a ground for the discharge to take effect under the applicable law.Footnote 65
This article will return to the position where the place of the opening of insolvency proceedings is not the place of the debtor’s residence or one with strong ties to the business at the time of the contract. For the moment, let it be assumed that it is one of those places. A supplier who wishes their contract to be governed by a law with which they are familiar is scarcely likely to give thought to the possibility that another law might govern the renegotiation of the contract or, indeed, in many cases will not have the resources to investigate the effects of that other law even if they can contemplate it. At the same time, it is important to be alive to the consequences of insolvency law for the availability and cost of credit for companies in the healthy economy. If the debtor and creditor can agree that a specific law should govern both the contract and the renegotiation of that contract in distress, and in doing so increase the availability, and decrease the cost, of credit in the healthy economy, this is flexibility that should be supported.
5. Rome I
This analysis gains more force when considering the EU’s Rome I Regulation (Rome I).Footnote 66 The argument here is that the rule governing the discharge of debt in Rome I essentially reflects the Gibbs rule. In other words, the Gibbs rule is not nearly as exceptional as it is sometimes portrayed to be. Article 12(1)(d) Rome I provides that the law applicable to a contract shall govern ‘the various ways of extinguishing obligations, and prescription and limitation of actions’.Footnote 67 At first sight, this would appear to be the end of the matter, but Article 1(2)(f) provides an exclusion for:
questions governed by the law of companies and other bodies, corporate or unincorporated, such as the creation, by registration or otherwise, legal capacity, internal organisation or winding-up of companies and other bodies, corporate or unincorporated, and the personal liability of officers and members as such for the obligations of the company or body.
Look Chan Ho argues that this exclusion means that a ‘bankruptcy discharge’ is excluded from Rome I.Footnote 68 Ho goes on to argue that ‘Rome I … should not be read as saying that bankruptcy discharge is a contractual matter’.Footnote 69
It is suggested here that the better view is that the exception, which refers to the ‘creation’, ‘legal capacity’ and ‘winding up’ of bodies corporate, does not cover the restructuring of liabilities as part of a corporate reorganisation. This conclusion is advanced both as a matter of reading the plain words on the page and because the analysis in this article arrives at a different conclusion from Ho on the nature of the bankruptcy discharge. ‘Winding up’ must, it is suggested, refer to the situation in which the assets of a firm are realised, the proceeds distributed, and the company eventually ceases to exist. Rome I suggests that different choice of law considerations apply in this event, and that the law governing the contract will not govern questions of discharge. This is consistent with the idea that the parties ought not to be able to contract out of the consequences of mandatory insolvency law. Yet when what is at stake is a renegotiation process, the governing law of the contract continues to determine the range of possibilities.
Other authors have agreed. In the context of recognition of an English scheme by a German court, Stefan Sax and Marie Berkner state:
Rome I regulates, in Art 12 para 1(d), that the applicable law is also decisive for a discharge/compromise of claims. This would mean that the German court itself would examine whether and to what extent the claim under the Part 26 Scheme or Part 26A Restructuring Plan has been discharged/compromised. Rome I would, therefore, not lead to an automatic recognition of the English court sanctioning decision but only the applicability of English law.Footnote 70
Similarly, Mark Phillips and Paul Fradley argue:
Rome I enables the parties to a contract to choose the law applicable to their contract and provides that the chosen law governs “the various ways of extinguishing obligations”. That applicable law does not need to be the law of an EU Member State. If English law is chosen, the rule in Antony Gibbs & Sons v La Societe Industrielle et Commerciale des Metaux is that an English law contract will not be discharged by a foreign insolvency. In the context of a scheme of arrangement, where English law has been chosen only an English scheme will be effective to extinguish or vary the debt. Applying Rome I, where there is an English choice of law, and a scheme of arrangement varies or extinguishes that debt, that contractual effect will continue to be recognised across the EU.Footnote 71
Overall, the argument advanced here is that Gibbs reflects the ‘right’ rule in corporate restructuring and that, far from being exceptional, it is the same rule as that found in Rome I. To sustain this position, however, it must be asked why choice of law rules cannot be developed for a corporate restructuring, as this article has suggested can and should be done in the context of an insolvency sale and distribution. In other words, the question is whether the MLCBI can be modified to address choice of law for both insolvent realisations and restructurings, so that the rule in Gibbs can be comprehensively consigned to history. The EIR indeed purports to offer choice of law rules for restructuring procedures, so that it does seem to offer a model to achieve this aim. When the lid is lifted on the detail, however, the extent to which it provides a workable model is questionable.
6. The EIR, restructuring, choice of law and the rule in Gibbs
The EIR initially came into force in all Member States except Denmark in May 2002. In 2011, in anticipation of its tenth anniversary, a full review of its operation was commissioned, and it was recast in 2015. The original EIR applied to ‘collective insolvency proceedings which entail the partial or total divestment of a debtor and the appointment of a liquidator’Footnote 72—what this article has called insolvency sales and distributions. The scope of the recast was, however, significantly extended, so that Article 1(1) now stipulates that it applies ‘to public collective proceedings, including interim proceedings, which are based on laws relating to insolvency’ in which:
… for the purpose of rescue, adjustment of debt, reorganisation or liquidation:
-
(a) a debtor is totally or partially divested of its assets and an insolvency practitioner is appointed;
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(b) the assets and affairs of a debtor are subject to control or supervision by a court; or
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(c) a temporary stay of individual enforcement proceedings is granted by a court or by operation of law, in order to allow for negotiations between the debtor and its creditors, provided that the proceedings in which the stay is granted provide for suitable measures to protect the general body of creditors, and, where no agreement is reached, are preliminary to one of the proceedings referred to in point (a) or (b).
Proceedings within scope are then listed in Annex A, which provides the definitive source for proceedings covered by the EIR.Footnote 73
This might suggest that the EIR can provide a blueprint for a choice of law regime in the MLCBI for both insolvent sales and restructurings. There are, however, several difficulties here. Recall that the general rule in the EIR is that the law of the place of the opening of the insolvency proceedings determines the rules governing the distribution of proceeds of sale, the ranking of claims and the rights of creditors who have obtained partial satisfaction after the opening of insolvency proceedings by virtue of a right in rem or through a set-off. However, recall too, that there are several important exceptions to this general rule, including Article 8. As has already been seen, Article 8 deals with third party rights in rem over assets situated in a Member State where neither main, nor secondary, proceedings have been opened. Article 8(1) provides that:
The opening of insolvency proceedings shall not affect the rights in rem of creditors or third parties in respect of tangible or intangible, moveable or immoveable assets, both specific assets and collections of indefinite assets as a whole which change from time to time, belonging to the debtor which are situated within the territory of another Member State at the time of the opening of proceedings.
There is some debate about the breadth of the stipulation in Article 8(1) that the law of the insolvency proceedings ‘shall not affect’ the rights in rem of creditors and third parties at the opening of such proceedings. On one view, Article 8(1) merely protects the right in rem itself (the security interest over the relevant assets) and not the rights that the secured creditor has against the debtor. If this is right, then a restructuring plan could still be effective to compromise the underlying debt. The other view, however, is that Article 8(1) also prevents a variation or discharge of the debtor’s secured indebtedness over any assets located in other Member States, other than in accordance with the lex situs. If this is right, a secured creditor with security over assets in a jurisdiction other than that in which the insolvency proceedings are opened may continue to enforce their rights in accordance with the lex situs.Footnote 74
This uncertainty has had the perhaps counterintuitive result that, rather than seeking to rely on restructuring procedures within the scope of the EIR in the hope that this will secure cross-border recognition, debtors have preferred restructuring procedures that clearly fall outside it. Before Brexit, UK schemes of arrangement proved particularly popular for this purpose.Footnote 75 Recital (16) EIR provides that ‘proceedings that are based on general company law not designed exclusively for insolvency situations should not be considered to be based on laws relating to insolvency’. Schemes of arrangement are found in the UK Companies Act 2006 and are regularly used to implement solvent takeovers and other solvent reorganisations. As a result, they are not listed in Annex A and do not fall within the scope of the EIR. At the same time, before the UK left the EU, there was at the very least a good argument that they did fall within the scope and recognition framework of the Brussels I Regulation, which governs civil and commercial disputes.Footnote 76 This meant that several overseas companies turned to the scheme of arrangement as a debt restructuring procedure. The uncertainty also meant that when Germany and the Netherlands introduced new restructuring procedures, they offered a non-public version of the procedure that would fall outside the EIR, thus avoiding the Article 8 problem.Footnote 77 Perhaps most importantly of all, however, it has meant that there has been very little serious discussion of the suitability of the EIR as a framework for recognition and enforcement of restructuring plans.
This brings the article to the crux of the problem: it is not at all straightforward to design such a framework. To unpack this argument, it is necessary to go back to the roots of the EIR as a framework for the recognition and enforcement of rights in assets and proceeds of sale. Different jurisdictions may have very different orders of distribution in insolvency: for example, employees are afforded higher priority in France than in many other jurisdictions.Footnote 78 The EIR handles this tension by respecting differences in distributional priority but only to the extent of assets within the specific jurisdiction.Footnote 79 Similarly, creditors may have different rights in the assets in different jurisdictions: for example, suppliers may have more powerful interests pursuant to German law governed retention of title clauses than suppliers with retention of title clauses subject to a different governing law.Footnote 80 The EIR handles this tension through choice of law rules. Thus, the EIR asks the question of how different distributional orders of priority and different interests in assets are to be addressed and answers it through a combination of the possibility of main and secondary proceedings and detailed choice of law rules.
As was seen in Section 3, it is possible to conceive of corporate restructuring as a hypothetical sale of the firm to the existing creditors. If this conception is adopted, then the central questions remain the same: who is interested in the assets and who is entitled to the proceeds of the corporate reorganisation transaction? The argument in this article, however, is that corporate restructuring or reorganisation should be conceptualised as something quite different—not, to borrow from Madaus, as a ‘day of reckoning’ in which the business and assets or assets of the firm are realised and losses are allocated, but as a renegotiation in which some creditors can benefit from the future value of the firm and others cannot.Footnote 81 The argument here is that, although the recast EIR dropped restructuring plans into the EIR’s scope, there was no proper attempt, at the same time, to sit back and consider what different questions arise in developing a framework that balances the approach of different laws to imposing a corporate restructuring plan on a creditor.
To unpack this a little more, the very different approaches that different jurisdictions have taken to the fairness of a restructuring plan on a dissenting class can be analysed. As has already been seen, the US Chapter 11 Bankruptcy Code assesses the fairness of a non-consensual restructuring plan by running the enterprise value of the firm down the insolvency distribution waterfall, using the APR and a rule of horizontal equity as its guide.Footnote 82 The UK Part 26A restructuring plan procedure does not mandate the APR, so that some recently sanctioned UK Part 26A restructuring plans would not be confirmable in Chapter 11 because they would not meet the APR requirement. At the same time, however, Chapter 11 takes a relatively straightforward approach to class classification that focuses on the pre-insolvency nature of the claim.Footnote 83 This means that a subset of creditors could be offered a right, for example, to participate in exit finance, without fracturing class.Footnote 84 In a UK Part 26A restructuring plan, on the other hand, class classification depends on both existing rights and all rights creditors are offered under the plan. As a result, it is likely that all creditors within a class would need to be offered the right to participate in exit financing, or the class would be fractured and the fairness of offering only favoured creditors the participation right would be subject to court scrutiny.Footnote 85 Thus, the question is whether a New York law governed bond can be compromised in a Part 26A restructuring proceeding, even if new terms are imposed on the bondholders that would not have been imposed by a court in the Southern District of New York applying the APR. Similarly, the question is whether an English law governed loan agreement can be compromised in a Chapter 11 proceeding, even if minority creditors within a class do not receive the protection that they would receive in a Part 26A restructuring plan.
The problem is that a framework based around the location of assets and rights in them does not help to solve this conundrum—in other words, the EIR regime of main and secondary proceedings and choice of law rules does not offer a great deal of assistance. This is because the relevant questions do not relate to rights in assets or their proceeds. At the same time, while well-advised, well-resourced, sophisticated financial creditors may be able to investigate laws with which they are not familiar and which they have not selected, this may not be possible for a trade supplier or even a small landlord. As was touched on in Section 1, a criticism of the Gibbs rule is that it prevents so-called ‘good’ forum shopping.Footnote 86 However, mandating the default rules that will apply prevents a debtor from harnessing the benefits of selecting a different set of default rules when it raises finance, potentially increasing the availability of credit or reducing its cost. And as has already been argued, if those benefits can be harnessed other creditors will benefit from them while the firm is healthy so that they are, to a certain extent, compensated for any disadvantage they suffer as a result in the reorganisation.
Thus, the argument advanced to this point is that the financially distressed debtor had good reasons for selecting the governing law and the case is not made out for preventing the parties from stipulating that this governing law will also determine the default rules that will be the reference point for any renegotiation in distress. And it is extremely difficult to conceive of a cross-border regime that somehow balances the different approaches to the fairness of a restructuring plan between jurisdictions in the way in which the EIR balances the different approaches to rights in assets and proceeds of sale. Thus, we find the Gibbs rule in both the UK and in Rome I. The position on a sale of the assets and distribution of the proceeds is different. Few difficulties arose with the effective overriding of the rule in Gibbs by the highly developed scheme of the EIR for insolvent sales and distributions. The problem is that the UK has left Europe, and the MLCBI does not currently offer the calibrated response to this balancing act that the EIR offers.
The late Ian Fletcher made the argument that the rule ‘belongs to an age of Anglocentric reasoning which should be consigned to history’,Footnote 87 while Adrian Walters has convincingly shown that English courts have historically seen themselves as vindicating the demands of comity by granting foreign debtors access to the tools of English insolvency law.Footnote 88 Three points may be made. First, as has already been seen, it is argued here that Rome I adopts the same approach as the Gibbs rule, so that the rule cannot be cast as an example of English exceptionalism. Second, it is difficult to cast Gibbs entirely as a rule of ‘Anglocentric reasoning’ because it applies equally to discharge of foreign law debts where the law of the contract is not English law. And finally, the core claim in this article is that even if the origin story no longer applies, there is a place for the rule in the modern landscape.
Before concluding, however, it is useful to cross-check the analysis offered here with the purposes of cross-border recognition identified in the US implementation of the MLCBI in Chapter 15 of the Bankruptcy Code: that cross-border insolvency law should promote greater legal certainty for trade and investment; that it should secure the fair and efficient administration of cross-border insolvencies in order to protect the interests of all creditors and other interested entities; that it should protect and maximise the value of the debtor’s assets; and that it should facilitate the rescue of financially troubled businesses in order to protect investment and preserve employment.Footnote 89 In the next section, each of these purposes is taken in turn to consider whether they comprehensively militate against application of the rule in Gibbs.
7. Other factors
7.1. Promoting greater legal certainty for trade and investment
As has been seen, opponents of the rule in Gibbs typically demand that the law of the State of opening of the insolvency proceedings should govern the discharge of the debt, rather than the governing law of the contract. In both the EIR and the MLCBI, the dominant concept is that the insolvency proceedings should be opened in the place where the debtor has its COMI, although proceedings may also be opened in a place where the debtor has an establishment (which requires more than the mere presence of assets in the jurisdiction, but is most likely to be relevant where a debtor has significant assets in the jurisdiction). The EIR provides that the COMI is ‘the place where the debtor conducts the administration of its interests on a regular basis and which is ascertainable by third parties’.Footnote 90 It goes on to provide that this shall be presumed to be the place of the registered office, but this presumption may be rebutted. COMI is not defined in the MLCBI but is similarly presumed to be ‘the debtor’s registered office’.Footnote 91
Crucially, however, a debtor’s COMI can move. Accordingly, a debtor who wishes to rebut the registered office presumption at the time of the opening of the insolvency proceedings can provide evidence that at that time it is administering its interests on a regular basis in another jurisdiction. The ability for counterparties to protect themselves against a shift in COMI, and therefore against the risk that the laws of a new jurisdiction will govern the discharge of their debt rather than those that they would have been able to ascertain at the time that they entered their contract, is limited. While COMI may provide greater certainty for trade and investment where there is a compelling case for a single unitary proceeding governing the realisation of assets and the distribution of proceeds, without a doubt it is less certain for a counterparty to a contract than an expectation that the default rules that they have chosen will apply in restructuring negotiations. As has been seen, Singapore tries to sidestep the problem with the flexible nature of the COMI concept.Footnote 92 However, as has also been seen, many creditors, such as small suppliers, contracting from outside the place where the debtor is registered or where it conducts the bulk of its operations, may have limited capacity to diligence laws with which they are not already familiar. For those creditors, certainty in trade is promoted by allowing them to select the default rules that will be the reference point for restructuring negotiations.
Recently, the focus on the debtor’s COMI has been the subject of some reassessment. In an open letter to UNCITRAL Working Group V, Antony Casey, Aurelio Gurrea-Martinez and Robert Rasmussen have queried the role of COMI in determining where main corporate insolvency proceedings are opened.Footnote 93 They list several issues with the COMI concept including that: (i) it may encourage debtors to initiate insolvency proceedings in their local jurisdictions, ‘even if their local jurisdictions have an inefficient insolvency system’; (ii) the concept of COMI is far from clear, so that ‘a market participant can never be entirely sure about the place of debtor’s COMI’ and lenders will, in response, ‘rationally price their loans assuming the worse scenario’ while other market participants might be discouraged from doing business with the company at all; (iii) different stakeholders may have different views on COMI that will need to be resolved by courts, potentially at some cost; and (iv) COMI may encourage opportunistic behaviour by debtors. This leads the authors to suggest that debtors should be free to specify the place where an insolvency proceeding will be initiated or, as a second-best approach, should at least be free to initiate insolvency proceedings in any jurisdiction that permits the initiation of insolvency proceedings by foreign companies. Furthermore, the MLIJ abandons the COMI concept, relying instead on the concept of an insolvency-related judgment.Footnote 94 Irit Mevorach has suggested that it was hoped a new instrument that did not rely on COMI might encourage more jurisdictions to participate in the cross-border regime.Footnote 95
The first of Casey, Gurrea-Martinez and Rasmussen’s proposals—that debtors could specify where an insolvency case would be started—might increase predictability for trade and investment over the current COMI concept. However, for creditors without the capacity to inform themselves about another system of law, these predictability benefits will be lower than knowing that the governing law of the contract will be applied. And there are real practical questions about how such an approach would be implemented in practice. Their second approach, and the approach in the MLIJ, appears to pose an even greater problem for predictability than the existing COMI concept, even taking account of the ability for COMI to move. Overall, the discussions highlight the problems with the existing regime and suggest that in the current environment the rule in Gibbs may play an important role in promoting predictability for trade and investment.
7.2. Securing the fair and efficient administration of cross-border insolvencies in order to protect the interests of all creditors and other interested parties
The objective of fair and efficient administration of the case is fundamental to the argument of so-called universalist cross-border insolvency law theorists that there should be a single unitary procedure governing the realisation of the assets and the distribution of the proceeds, wherever they are located. This is said to be both the fairest and the most efficient way to administer a cross-border case.Footnote 96 Nonetheless, neither the EIR nor the MLCBI pursue an entirely universalist ideal. As has been seen, both contemplate the possibility of proceedings in more than one jurisdiction. Moreover, as has also been seen, the EIR contains detailed choice of law rules that have the result that a law other than the law of the place of the opening of insolvency proceedings will govern the issue at hand.Footnote 97 This has led one US commentator to argue that the EIR is ‘essentially a territorial system with universalist pretensions’.Footnote 98 At their core, however, both the EIR and the MLCBI have a universalist ambition, pushing in the direction of main proceedings and a single law governing many, if not all, of the issues in the case.
Once again, however, there is a real question about what fair and efficient administration of the case means in the context of cross-border insolvency. Indeed, different conceptions of ‘fair’ explain why the EIR modifies the universalist ideal as substantially as it does. In the restructuring context, it is very difficult to think of a restructuring case in which all the debtor’s liabilities are renegotiated and in which all creditors crystallise a loss. As has already been seen, while Chapter 11 starts from the proposition that all the firm’s assets and claims are brought within the insolvency case for resolution, in reality many creditors will ride through the case entirely unscathed.Footnote 99 Indeed, as has also been seen, UK and European procedures are explicitly designed so that the debtor can choose which creditors to bring within the renegotiation.Footnote 100 And, in any event, it is fundamental to most restructurings that some creditors will crystallise a loss, while others will not. Against this backdrop, it is difficult to see why it is ‘fair’ to force those creditors who are subject to renegotiation into a specific forum, in the interests of creditors and other interested parties who are either not subject to renegotiation or are not crystallising a loss. Moreover, as has been seen, the debtor will have had good reasons for choosing or agreeing to the governing law of the contract that may have made it possible to contract at all or at least reduced the costs of doing so. The other creditors and interested parties have had the benefit of this while the company was successfully trading. It is difficult to see why those who have benefitted when things are going well should not also bear the burden when things go badly.Footnote 101
‘Efficient’ is equally as slippery here but probably simply means that the costs should not outweigh the benefits. Without doubt, transaction costs will be higher if the debtor must open insolvency or restructuring proceedings in more than one jurisdiction because it has chosen to govern different contracts by different governing laws. Yet, once again, these transaction costs are the burden that accompanies the benefit of choosing different governing laws in the first place. Higher transaction costs in insolvency should not be a reason to deny the parties the right to determine the default rules that will be the reference point for renegotiation in distress when they contract. Moreover, the UK has shown itself adept at reducing costs as much as possible. Ingenious UK practitioners developed the approach of offering an undertaking to local creditors to observe local rules of distribution as a quid pro quo for restraint in opening secondary insolvency proceedings in the jurisdiction.Footnote 102 A version of this method of cost reduction, commonly known as ‘synthetic proceedings’, is now found in the EIR.Footnote 103 Section 7.4 analyses the commercial and pragmatic approach adopted by a UK court to so-called parallel proceedings. There is also presumably room for a synthetic approach to be developed in appropriate restructuring cases, in which relevant creditors agree to be bound by the discharge notwithstanding that separate proceedings are not opened.
7.3. Protecting and maximising the value of the debtor’s assets
Concern for transaction costs is also said to be relevant because it undermines a principal objective of cross-border insolvency law in protecting and maximising the value of the debtor’s assets. However, this central concern for protecting and maximising the value of the debtor’s assets is most apposite when we are considering the realisation of assets through a collective process which prevents value-destructive individual enforcement—a ‘day of reckoning’. As Madaus identifies, this is not the central concern of a restructuring case. The aim of a restructuring is typically to return the company to profitable trading to generate future value.Footnote 104 And this becomes possible because of the compromises that are achieved with the creditors who are within the plan.Footnote 105 Even where a restructuring implements a wind down plan that is better than a court-supervised liquidation, the improved returns available under the plan become possible in whole or in part because of the compromises that certain creditors reach with the debtor.Footnote 106 Where creditors and interested parties enjoy the possibility of future value, as a result of the compromise of the liabilities of other creditors, the rights of other creditors to select the default rules against which the compromise is negotiated should be respected.
7.4. Facilitating the rescue of financially troubled businesses to preserve employment and protect investment
A final criticism that is often levelled at the rule in Gibbs is that it undermines the rescue objective. This is because it may require multiple proceedings in multiple jurisdictions, making it harder to keep the business and assets together. Yet employment and the investment incentive for healthy companies must also be protected: it is impossible to divorce the rule in Gibbs from the incentives of contract counterparties when they contract.Footnote 107 For all of the reasons already given, it is argued here that it is considerably more straightforward for a counterparty to contract with a company when things are going well if the default rules that will be the reference point for any renegotiation of their contract are predictable and are the ones that the counterparty has chosen. This is a powerful reason to support the rule in Gibbs. At the same time, while multiple proceedings undoubtedly do make a restructuring more complex, there is ample evidence that today’s sophisticated insolvency lawyers can navigate those complexities.
Section 7.2 touched on synthetic proceedings under the EIR and the possibility for a synthetic approach to be adopted in corporate restructuring transactions. Examples of proceedings in which the UK courts sanction a Part 26A restructuring plan that is being pursued in parallel with restructuring proceedings in another jurisdiction are also developing. In Hong Kong Airlines Ltd, the court sanctioned a Part 26A restructuring plan that was being pursued in parallel with a Hong Kong scheme of arrangement.Footnote 108 In an approach that on its face appeared novel in the UK, but not in Hong Kong, secured creditors voted with unsecured creditors in respect of the ‘under-secured’ portion of their claims. The court appeared to recognise the benefits of the Part 26A restructuring plan and the Hong Kong scheme mirroring each other and was able to turn to precedent in schemes of arrangement compromising insurance claims to support the approach. In Cimolai SpA, the court sanctioned restructuring plans proposed by two Italian companies that were also subject to concordato preventivo proceedings in Italy.Footnote 109 In that case, Trower J identified that the rule in Gibbs could have had the effect that a creditor with an English law governed claim would be better off if the restructuring proceeded only in England and if the debtor had significant assets in England. In this event, there would be difficulties sanctioning a plan that simply mirrored the Italian plan. On the facts of the case, however, the issue did not arise because the creditor would be excluded from receiving a dividend in the Italian proceedings if it were successful in enforcing its undischarged claim in England in a manner inconsistent with those proceedings. The debtor in question did not have sufficient assets in England to make this course of action worthwhile. It is suggested that it is unlikely that the rule will create impediments that are so significant as to stymie a corporate rescue attempt.
8. Conclusion
The argument advanced in this article is that the rule in Gibbs is normatively defensible in the context of a restructuring, having regard to the conceptual foundation of restructuring procedures. The author is reinforced in this conclusion by Rome I which, it is argued, provides the same rule. Various arguments commonly levelled against the rule in Gibbs have been analysed and evaluated: that corporate restructuring law should have the objective of promoting greater legal certainty for trade and investment; that it should promote the fair and efficient administration of cross-border insolvencies to protect the interests of all creditors and other interested parties; that it should protect and maximise the value of the debtor’s assets; and that it should facilitate the rescue of financially troubled businesses to preserve employment and protect investment. When these objectives are balanced against the benefits of the governing law approach for the healthy economy, the Gibbs rule is the right rule in this context. It is difficult to conceive of a coordinating regime that could balance these two concerns in a restructuring context.
The position is more complex in the context of insolvency sales and distributions of proceeds. It is possible to conceive of a cross-border insolvency regime that carefully balances the benefits for healthy companies of local proceedings and choice of law rules for an insolvent sale and distribution of proceeds against the benefits for bankrupt companies of having a single law to govern all the issues in the case. Indeed, the argument has been advanced that the EIR is precisely such a regime, so that no specific challenge arose when the rule in Gibbs effectively ceased to apply in UK insolvency proceedings in which the business or assets were sold. The argument has been advanced that since the UK left Europe it has not benefitted from a cross-border insolvency regime that does the heavy lifting of balancing these considerations in the way that the EIR does. Thus, the rule in Gibbs continues to provide important protection. However, work is underway at UNCITRAL to develop a more sophisticated choice of law framework for the insolvency model laws. It may well be that, once that work is completed, and once the MLCBI better regulates the relationship between main and non-main proceedings, it will be time to reassess whether the rule in Gibbs should apply in the context of insolvent sales and distributions.
Acknowledgments
This article benefitted enormously from the constructive criticisms of Riz Mokal and Irit Mevorach at the Insolvency Service Forward Thinking Conference 2023, and from comments by other participants and audience members at that event and at the Harvard-Wharton Insolvency Conference 2024. The author also wishes to acknowledge the helpful insights of the anonymous referee and of the Editor of this journal. The usual disclaimer applies.
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