In Defence of “Gibbs”?

Few 130-year-old cases continue to court as much controversy as Antony Gibbs & Sons v La Société Industrielle et Commerciale des Métaux.Antony Gibbs Sons v. La Société Industrielle Et Commerciale Des Métaux (1890) 25 QBD 399 (Court of Appeal). The resulting rule holds that, as a matter of English law, only the governing law of a contract may validly discharge or amend it. Although of application with respect to any choice of governing law, the rule in Gibbs applies predominantly in relation to creditors with English law-governed claims, maintaining that their debts may be validly discharged only by an English process absent the agreement of the creditor. That may take the form either of express agreement, or through a creditor’s conduct if, for example, it submits to the foreign insolvency or restructuring proceeding by voluntarily electing to participate in it.

The rule in Gibbs has been much criticised, perhaps most vividly by Professor Ian Fletcher who asserted that it “belongs to an age of Anglocentric reasoning which should be consigned to history.”Ian F. Fletcher, Insolvency in Private International Law (2005), 2.129. Many in the academic community seem to agree, whereas practitioners tend to support (at least tacitly) a rule that has allowed the English courts to act as a forum of choice for complicated cross-border restructurings, often in circumstances where alternative forums were unavailable or would deliver inferior outcomes.

Gibbs has been back in the spotlight recently in light of the UK government’s consultation on the UNCITRAL Model Law on Recognition and Enforcement of Insolvency-Related Judgments (IRJ Model Law). The consultation reaffirmed the government’s commitment to retaining the rule in Gibbs despite otherwise implementing the Model Law, reigniting debate about the rationale, limits, and benefits of the rule.

The Case Against Gibbs

The key arguments against Gibbs highlight that:

1. The rule is outdated and its effects cut across the doctrine of “modified universalism” that is integral to the effectiveness of modern cross-border insolvency proceedings. Critics argue that the rule undermines cooperation with foreign insolvency systems by imposing a territorial approach and ignoring international comity that respects the decisions of foreign courts.
2. The rule could oblige parties to run parallel (and in some cases, multiple) processes to obtain a compromise or discharge of the debt, although they have no connection to the English jurisdiction other than the governing law of their debt. This requirement leads to unnecessary additional expense, delay, and execution risk.
3. At a time of financial distress, and in particular upon insolvency, the parties’ freedom to choose the governing law of their contractual relationship must be superseded by the rules and outcomes of the collective creditor proceedings to which the debtor may become subject.

The Case for Gibbs

The rule provides legal certainty for both creditors and debtors. Contracting parties have confidence that their contracts will be treated in a predictable manner and, importantly, the rule guards against the risk of a debtor filing for insolvency proceedings in a jurisdiction that may not respect the creditor’s claim or its priority. The parties’ freedom to contract cannot be undercut by aggressive forum shopping.

Contracting parties highly value the commercial acumen of the English judiciary and the maturity of English jurisprudence in the restructuring field. Several foreign debtors and creditors have recently chosen to pursue schemes and restructuring plans in the English jurisdiction in preference to newer, less road-tested alternatives and not simply because the relevant debt was English law-governed.

While slightly self-serving, the fact that absent agreement only the English courts can vary English law obligations has been used as justification for the English courts to act in cases where otherwise the connections to the English jurisdiction were limited. This is usually at the agreement of both debtors and creditors and this choice should be maintained.

Some supporters link the rule’s certainty with continued future investment and the lower cost of credit for borrowers. Overturning the rule may force lenders to price in additional legal risk to borrowing costs in which the outcome may be less predictable if the credit becomes impaired.

Recognition of Insolvency-Related Judgments: Squaring the Gibbs Circle?

The UK government’s recent consultation on the implementation of the IRJ Model Law has reignited debate around the merits and relevance of the rule. If implemented as proposed by the government, the IRJ Model Law would in effect reverse the Supreme Court’s decision in RubinRubin and another (Respondents) v. Eurofinance SA and others (Appellants), [2012] UKSC 46. and provide a gateway for the enforcement in the UK of judgments arising from foreign insolvency proceedings. At the same time, the government was at pains to say that it had no intention of undermining the rule in Gibbs, and this position was reflected in the diluted proposed form of adoption (Article X). The “greater certainty of outcomes for the contracting parties” that the rule provides is not something the government is yet ready to jettison, at least not before consulting widely on its potential consequences. However, because of the ambiguity in the effect of Article X, the government’s proposed adoption may risk unintentionally throwing out the Gibbs baby with the Rubin bathwater. In any event, it seems an uncomfortable compromise to allow the recognition of bankruptcy-related judgments while maintaining a rule that does not recognise a compromise of English law-governed debt, which may be one of the fundamental outcomes of a foreign bankruptcy court’s judgment.

Practical Advantages

In practice, the rule in Gibbs alongside the English scheme or restructuring plan continues to deliver robust cross-border restructurings. The recent restructuring of Hong Kong Airlines demonstrates that parallel processes can be run efficiently and effectively, providing certainty to the Hong Kong incorporated debtor and its Chinese, European, and US-based creditors. Because Hong Kong has a similar common law rule when dealing with the compromise and discharge of Hong Kong law-governed debt, a complementary Hong Kong scheme of arrangement and English restructuring plan were necessary to deal with the company’s Hong Kong and English law-governed liabilities. Indeed, Mr Justice Harris, the presiding Hong Kong judge, has in a separate context recently referred to Gibbs as a “perfectly sensible approach” when dealing with cross-border restructurings. Absent the introduction of a replacement conflicts-of-law regime that commands multijurisdictional support, the rule’s understated merits may ensure its continued relevance for some time to come.