Considerations for Australian insolvency professionals
Introduction – why does this matter?
A critical consideration in cross-border restructuring is international recognition of the compromise and release of claims against a debtor in formal restructuring proceedings in the debtor’s home jurisdiction. The recent decision of the English High Court in relation to recognition in England of the Azerbaijani restructuring of the International Bank of Azerbaijan (“IBA”) (an Azerbaijan incorporated bank) saw application of an old common law rule leading to a conclusion that the restructuring would not be finally recognised in England in a manner that would release the claims of creditors with English law governed claims.
The decision highlights an important limitation to the effectiveness of the UNCITRAL Model Law on Cross-Border Insolvency, and is a blow to the concept of “modified universalism” in cross-border insolvencies. That limitation – being the ability to use a foreign insolvency proceeding to restructure English law claims against a debtor – needs to be front of mind for Australian insolvency professionals when planning a restructuring. Key points arising from the decision, and some further detail for those interested, follows.
The key points
Key learnings for Australian restructuring and insolvency professionals from the IBA decision (full copy here, care of BAILII) are:
- Applying the rule in Antony Gibbs, the Model Law does not permit final recognition of a foreign proceeding, at least to the extent that the foreign proceeding purports to release claims against the debtor governed by English law, where the creditor did not participate in the foreign proceedings. This means that, on the current state of the law in England, any interim moratorium on enforcement in England will lapse when the foreign restructuring is completed, and more importantly, will not then see a final recognition of any compromise and release in the foreign restructuring of English law governed claims against the debtor (for example, English law bank loans or bonds), where the creditor did not participate in that foreign restructuring.
- In the IBA decision, this now leaves holders of English law claimants against IBA (who did not participate in the Azerbaijan restructuring) free to enforce their claims against IBA in the English courts, unhindered by the release/compromise provided for in the Azerbaijan restructuring.
- This situation exposes a foreign debtor, which is moving toward a successful restructuring in its home jurisdiction (for instance, a deed of company arrangement or scheme of arrangement in Australia), to a real “greenmail” risk of being pursued in England by certain of its creditors, despite a compromise and release being effectuated in the debtor’s home jurisdiction.
- For Australian debtors and insolvency professionals considering an Australian law scheme of arrangement that may seek to compromise English law governed claims, the IBA decision is most likely also relevant to the discretion of the Australian court to approve the scheme – ineffectiveness in England would be a factor against approving the scheme.
- The approach to this issue in England now differs from that taken in the United States, where it is clear that the US Bankruptcy Court will give final relief (using the Model Law) that provides for a compromise/release in the foreign restructuring to compromise US law governed claims. That difference of approach in the US may provide a mitigant to this risk (discussed below in the detailed discussion).
- Finally, focusing on Asia Pacific, it is worthwhile noting that while the rule in Antony Gibbs does not appear to be the law in Singapore, it does seem to also be the law in Hong Kong, and it is not yet clear if Australian courts would follow the rule. So, pending any clarification from the English Court of Appeal, there would be some unpredictability as to whether or not foreign law restructurings of Hong Kong or Australian law claims would be effective.
Industry talk is that the IBA decision is on appeal to the English Court of Appeal, and that the Azerbaijan authorities have taken steps to facilitate time being allowed for such an appeal to unfold – an appeal would not be surprising, and IBA’s representative would be buoyed by the widespread academic criticism of the rule in Antony Gibbs in a post-Model Law world. A decision in the Court of Appeal may see a reversal of the current situation, but in the meantime the risk outlined above needs to be carefully considered when dealing with a debtor that has English law governed claims against it.
For those interested, some more detail follows.
The details
Overview of the decision
IBA is an Azerbaijan incorporated bank. After striking financial difficulty, IBA was placed into the applicable Azerbaijan law restructuring procedure. That restructuring proceeding was granted interim recognition in England, under the Model Law, as a “foreign main proceeding” – that interim recognition saw a moratorium put in place against any of IBA’s creditors taking steps to enforce in England claims against IBA, while the Azerbaijan restructuring proceeding was under way.
The Azerbaijan proceeding was successfully progressed, with a plan approved in that jurisdiction. IBA (acting by its representative) then sought relief in England, in effect by way of final recognition of that restructuring plan, under the Model Law. Importantly, the relief would effectively see English law governed claims (held by creditors who did not participate in the Azerbaijan proceeding) against IBA compromised and released, by operation of the relevant provisions of the Azerbaijan restructuring law.
This course was opposed by a group of IBA’s creditors, who (importantly) held claims against IBA that were governed by English law (being certain bank loans and bonds). This group of creditors did not participate at all in the Azerbaijan restructuring proceeding. It can also be inferred that those creditors did not have any presence in Azerbaijan, such as might enable the Azerbaijan court to exercise jurisdiction over them (e.g. by way of injunction).
In resisting the final recognition orders, the group of creditors relied on the old common law rule in Antony Gibbs. Broadly, that rule – most famously explained by the English Court of Appeal in the 1890 decision Antony Gibbs & Sons v La Societe Industrielle et Commerciale des Metaux – provides that an English law governed debt cannot be discharged by operation of a foreign law. IBA’s resisting creditors contended that, despite what the Model Law might provide in relation to interim recognition of the Azerbaijan proceeding, once that proceeding concluded (and the moratorium fell away) then the rule in Antony Gibbs meant that any release and compromise in the Azerbaijan restructuring plan could not be recognised by the English court as releasing the English law governed claims against IBA.
This was resisted by IBA, primarily on the basis that the Model Law provided for the grant by the English court of final relief (not just interim relief) in recognising the Azerbaijan restructuring plan. That power enabled the English court to effectively over-ride the rule in Antony Gibbs, and to give effect in England to the foreign law release of English claims.
Following a detailed and thoughtful review of the authorities, the trial judge determined that (pending reversal by the Court of Appeal) he was bound to apply the rule in Antony Gibbs, and that he could not rely on the Model Law to effectively side-step that rule.
Is this decision correct?
It is difficult to criticise the approach taken by the trial judge; he is bound by the earlier Court of Appeal decision in Antony Gibbs, and the construction of the Model Law, dealing with availability of “final relief”, was aided by some (but not all) of the relevant decisions in England.
That said, the approach taken in the IBA decision to construction of the Model Law is a departure from some other first instance decisions in England. Further, and significantly in the context of an international treaty, being the Model Law, the decision is at odds with the prevailing jurisprudence in the United States. For instance, final relief of the kind sought by IBA has been granted in similar situations, including US recognition of the Australian law scheme of arrangement made in relation to the New York law governed bonds issued by Emeco Holdings Ltd.
So, an appeal from the decision may well have prospects.
The impact for Australian debtors
In the meantime, the IBA decision does represent the law in England on this issue. Relevant to restructuring in Asia Pacific, the IBA decision is probably also the law in Hong Kong and possibly also in Australia, while the Singapore courts seem to have moved away from the rule in Antony Gibbs in a post-Model Law world. So, from an Australian debtor’s perspective, using an Australian deed of company arrangement or scheme of arrangement to deal with English law governed claims against it is complex.
This complexity in designing formal restructurings of Australian debtor companies is not merely theoretical. The effectiveness across borders of a “home jurisdiction” restructuring in Australia that involves releases of claims against the debtor governed by foreign laws (especially a very significant jurisdiction like England and also Hong Kong) is critical in any cross-border restructuring.
Further, for an Australian debtor considering a scheme of arrangement under Part 5.1 of the Corporations Act 2001, the IBA decision has further relevance. That is because, where an Australian scheme may seek to compromise English law claims, it is clear that ineffectiveness of the scheme as against English law creditors is a factor relevant to the Australian court’s discretion to sanction the scheme of arrangement (see Re Rodenstock GmbH [2011] EWHC 1104 (Ch)). So, the IBA decision has an additional impact on Australian schemes of arrangement.
Where to now?
Practical considerations may well be the answer in most cases.
For instance, in many instances, creditors who hold English law governed claims will be present (e.g. through a branch office) in the home jurisdiction of the debtor – that presence may enable the debtor to seek injunction or similar relief from the home jurisdiction court against the creditor, to effectively bind that creditor to the restructuring plan. Those creditors might alternatively elect voluntarily to participate in the restructuring proceeding (in which case the rule in Antony Gibbs has no application).
Similarly, there will be other occasions where there are no assets of the foreign debtor in England, which could be subject to enforcement proceedings in England by the creditor who holds English law governed claims.
Further, a foreign proceeding that is by way of terminal liquidation (as opposed to restructuring of a going concern) seems more likely to be supported by the English courts (see for example, Re HIH Casualty and General Insurance Ltd [2008] 1 WLR 852). Early consideration of those practicalities is now more important than ever.
Parallel English law scheme of arrangement?
Some commentators have suggested that a solution for English law claims might be for the debtor to run a parallel English law scheme of arrangement, in conjunction with the foreign restructuring proceeding. That option should of course be considered closely, but great care would be needed in order to avoid simply handing further “greenmail” power to a minority group of English law creditors. If those English law creditors are the only creditors impacted by (and voting on) the English scheme of arrangement, the debtor will find itself at the mercy of those creditors, in attempting to have the English scheme approved.
International treaties on recognition of judgments?
Finally, there might be some solace for Australian and other Asia Pacific debtors in international treaties – both bilateral and multilateral – dealing with recognition of foreign judgments. While the UNCITRAL activity in relation to recognition of insolvency-related judgments remains pending, and this “work in progress” may well provide an answer to the impact of the IBA decision, bilateral treaties between nations that deal with enforcement of civil judgements may well facilitate the recognition in England of a court-driven restructuring in Australia by way of scheme of arrangement.
Of course, treaties dealing with enforcement of judgements will most likely not assist with Australian deeds of company arrangement – that procedure, being administrative rather than curial, would probably not attract the operation of a judgements treaty.
Recognition first in the United States?
An alternative solution might look to take advantage of the different approach taken by the US Bankruptcy Court to availability of “final relief” under the Model Law. In appropriate instances, applying the US approach an Australian debtor could seek recognition (under the Model Law) in the US of its Australian restructuring proceeding – this could be either a scheme of arrangement or a deed of company arrangement.
Once that US recognition is obtained, the final relief obtained in the US could then be enforced against English law creditors who have a presence (e.g. by branch office) in the US (and so are susceptible to the jurisdiction of its courts). While perhaps a little circuitous, and certainly not perfect, this solution should be given close consideration in appropriate cases.
