Is the rule in Gibbs justifiable in the context of modern international insolvency laws or is England clinging to an outdated rule simply to keep restructurings here? The rule stems from an 1890 Court of Appeal Case, which holds that only English courts can validate the compromise or discharge of English law governed debt. The rule cuts across the trend of increased cross-border cooperation in insolvency matters – commonly described as the “modified universalist” approach and critics see the rule as a relic of a more Anglo-centric approach to insolvency law. This outdated philosophy does not mirror the globalization of commerce and law, and thus arguably contrasts universalism with territorialism.
Nonetheless, the rule in Gibbs remains good law, at least in the UK and Hong Kong. There have been international developments; the UNCITRAL Model Law on the Recognition and Enforcement of Insolvency-Related Judgments 2018 (“IRJ Model Law”) complements the 1997 Model Law on Cross-Border Insolvency (implemented in the UK through the Cross-Border Insolvency Regulations 2006 (CBIR 2006) and adopted by 23 other countries). The UNCITRAL Model Laws make foreign restructurings binding in other jurisdictions that have adopted the model laws. But the scope of the 1997 Model Law is limited in the UK. In the most recent Court of Appeal affirmation of the rule in Gibbs, the 2018 case of the International Bank of Azerbaijan, the court ruled that the UNCITRAL Model Law 1997 (through the CBIR 2006) is merely procedural and cannot interfere with how the Gibbs rule protects substantive English law contract rights.
Seemingly, the newer IRJ Model Law (not yet enacted as part of English law) asserts universalism more than territorialism, most notably, perhaps, the rule in Gibbs – i.e., Article 13 of the IRJ Model Law specifically provides that recognition and enforcement of insolvency-related judgments is mandatory. However, in the recent UK Government Consultation, published on July 7, 2022, on the IRJ Model Law, the UK government sets its face against implementing the IRJ Model Law in full. It has no intention of undermining the Gibbs rule, as it provides “certainty to contracting parties” and makes English law attractive for international use.
Application of the Gibbs rule is actually more nuanced than simply not recognizing adjustment of an English governed debt by a non-English court. In a recent Hong Kong judgment of June 6, 2022 after sanctioning a scheme for Rare Earth Magnesium Technology, the Hong Kong courts clarified that the Gibbs rule did not prevent the recognition of a “foreign” insolvency procedure (in this case a U.S. Chapter 15 procedure). Had the foreign scheme purported to compromise substantive legal rights of parties to an agreement, only then would the rule in Gibbs be engaged.
Arguably modified universalism may have reached its zenith if it overlooks trusted legal mechanisms. Proponents of the rule in Gibbs argue that parties choose English law to govern their debts because one of the incidents of their choice is that it falls to the English courts to adjudicate changes to those debts. They’re exercising a freedom to contract. While the principle that parties should be able to insist on the law of their choice and the courts of a particular jurisdiction having sole authority to compromise their debt – there’s still a sneaking feeling that this also serves the purpose of forcing international restructuring business to be conducted in the English jurisdiction, and baked into that is an irritating belief in the superiority of the English court.
Authored by Howard Morris. Sakshi Rai, London Trainee Solicitor, and Guy Wilcock, a summer intern at the London MoFo office, have contributed to the drafting of this alert.