Leading from the front: UK's Cross-Border Insolvency Regime to be upgraded following UNCITRAL Consultation

The Government intends to enhance the UK's cross-border insolvency regime with the adoption of the UNCITRAL Model Law on Enterprise Group Insolvency (MLEG) and, after further consideration, Article X of the UNCITRAL Model Law on Recognition and Enforcement of Insolvency-Related Judgments (MLIJ).

In its response to the consultation on the implementation of the MLEG and the MLIJ, the Government has confirmed that it intends to press ahead with the adoption of both the MLEG and Article X of the MLIJ (the Model Laws), albeit according to different timelines.  As per the consultation response, implementing the Model Laws will enhance the UK's already highly-regarded cross-border insolvency regime; ensure that the UK remains aligned with international best practice; and position the UK to lead, influence and respond to future cross-border insolvency developments.

How was the consultation received?

The MLEG

The majority of respondents either supported or had no objections to adopting the MLEG, but felt that it would not bring about "revolutionary change" in the first post-implementation years.  Apathy towards its adoption can be partly explained by the fact that the MLEG can only be utilised by adopting states (of which the UK is likely to be one of the very first, if not the first) and it could take years, even decades, for a sufficient number of states to adopt it such that it is generally available.  It has also been suggested that the substantive effect of the MLEG can already be achieved in England and Wales, by way of cooperation agreements and court-to-court protocols.  So, in practical terms, its impact on cross-border insolvency may well be very limited.  Nevertheless, the Government has resolved to adopt the MLEG into English law at the earliest opportunity.

Article X

There was no such ambivalence in relation to the proposals for Article X.  Some respondents welcomed the proposal to adopt Article X, on the basis that the full text version of the MLIJ could potentially overlap, or give rise to inconsistencies, with the MLCBI.  However, a large proportion of respondents expressed concern at the potential for conflict with the rule in Gibbs¹ (notwithstanding that the Government's proposals were not intended to affect Gibbs) and the way in which Article X is proposed to partially overrule the Supreme Court's decision in Rubin v Eurofinance², both of which may give rise to legal uncertainty.  The Government has therefore concluded that, whilst it is appropriate to enable the recognition of foreign judgements through Article X rather than by adopting the long-form MLIJ, further development of the policy and impetus for the adoption of Article X and the technical detail of the proposal is required before it is ultimately implemented into domestic law.

But why does the Article X proposal incite such strong debate?  The decisions in Gibbs and Rubin, and resulting policy on cross-border insolvency, provide important context.

The Rule in Gibbs

Under the nineteenth century Court of Appeal decision in Gibbs, a discharge of debt under the insolvency law of a foreign country will only be recognised in England and Wales if it is discharged in accordance with the governing law of the contract.  It follows that an English law-governed debt cannot be discharged or compromised by foreign insolvency proceedings.

Rubin v Eurofinance

Rubin concerned a New York Court judgment based on insolvency avoidance powers which was obtained in default of the appearance of the defendant (the judgment in question being for $10 million in respect of fraudulent conveyances and transfer).  It was accepted that the judgment debtor was not present in the US, nor had they submitted to the US jurisdiction.  Office holders sought to enforce the judgment in England and Wales, under English common law rules and the CBIR.

It was common ground that under English common law principles, an English court would only recognise the jurisdiction of a foreign court to deliver an in personam judgment (i.e. relating to a person's rights and interests) if the judgment debtor (i) was present in the foreign jurisdiction when proceedings commenced; (ii) had made a claim or counterclaim in the foreign proceedings; (iii) had submitted to the jurisdiction by voluntarily appearing in the proceedings; or (iv) had agreed to submit to the jurisdiction.  The question in Rubin for the Supreme Court, in relation to the English common law, was whether 'special' rules applied in the context of cross-border insolvency, which required the English court to assist foreign courts by doing whatever it could do in a domestic insolvency case (thereby avoiding the need to open local insolvency proceedings and ensuring that a company's assets are distributed to creditors under a single distribution system).

In the Court of Appeal, it was held that the court had the power, under English common law principles and under the CBIR, to enforce the US court's judgment.  On appeal to the Supreme Court, however, it was held that (i) special rules do not apply in the context of cross-border insolvency; and (ii) as the CBIR contains no express provision dealing with enforcing a foreign judgment against a third party, there was no power for the court to do so under the CBIR.  

Against this backdrop, governmental policy on cross-border insolvency and the model law in particular has been shaped.  One of the primary drivers for the adoption of Article X is, unsurprisingly, a commitment to supporting and furthering international cooperation in insolvency proceedings.  However, modifying cross-border insolvency legislation naturally necessitates consideration of the thorny interplay between the model law framework, the rule in Gibbs and the decision in Rubin.  As the consultation acknowledges, adopting the full version of the MLIJ presents two significant challenges: (i) it could undermine the rule in Gibbs; and (ii) given that it sets out a freestanding framework for the recognition and enforcement of judgments independent of the MLCBI, which is not a duplication or simple restatement of the system that would be created in the MLCBI through the adoption of Article X, implementing both systems may counterproductively create some ambiguity for the courts when it comes to recognising and enforcing foreign insolvency judgments. Article X, on the other hand, supposedly offers a neater alternative that is not proposed to override the rule in Gibbs, nor give rise to increased ambiguity.  Whether this will be the case in practice was hotly debated by respondents to the consultation.

What's our view?

The impact of Article X on the rule in Gibbs is particularly important. Gibbs has been subject to criticism in the past because it naturally raises questions around the balance to be struck between the need to provide legal certainty for the discharge or compromise of contractual debts and the desire for efficiency in cross-border insolvency proceedings.  Nevertheless, Gibbs has gained greater relevance in recent years because English law has taken a less integrated legal path following the UK's departure from the European Union.  Post-Brexit, jettisoning the rule in Gibbs and effectively permitting English law-governed debt to be discharged under foreign insolvency proceedings could clearly have far-reaching implications for holders of English law-governed secured debt in particular, and the UK more generally on the international restructuring stage.

But what impact will Article X have on Gibbs in practice?  According to the consultation proposal, Article X will provide a new route for the recognition of foreign insolvency-related judgments in the UK, so that such judgments can be recognised if recognition will assist foreign insolvency proceedings.  It is anticipated that its adoption will set aside the decision in Rubin, to the extent that it was held that the CBIR does not extend to the recognition or enforcement of foreign judgments against third parties.  However, the intention is that any recognition by virtue of Article X will be at the court's discretion, so the English court will continue to have regard to other English law (i.e. Gibbs) and apply the safeguards specified in the CBIR.  Accordingly, the proposal states that the adoption of Article X will not impact the application of the rule in Gibbs.

It is this discretionary element that has incited such strong debate.  Allowing recognition of foreign insolvency-related judgments through the court's discretion is, according to the proposal, supposed to bypass the rule in Gibbs altogether.  However, consultation respondents lacked confidence in this approach and thought that the adoption of Article X could nonetheless undermine Gibbs. It was argued that such an established and longstanding legal principle should not be jeopardised in this way without a thorough policy debate on (i) the merits of repealing it; and (ii) whether any clear choice of law rules are required if it is concluded that it should be repealed. 

What is clear following the UNCITRAL consultation is that market sentiment, which may well have been more ambivalent about overruling Gibbs pre-Brexit, has shifted.  Now, it seems that the overriding sentiment is concern about the impact of Article X on the marketability of English law as a means of international trade.  Whilst respondents supported the overarching goal of furthering international cooperation in insolvency proceedings, it was thought that this should not be at the expense of longstanding legal principles that contribute to the robustness and international appeal of the English law insolvency framework.

Some respondents also pointed out that whilst Gibbs has attracted criticism (particularly from American commentators) for being outdated and territorial, it is in fact consistent with the European Regulation on the law applicable to contractual obligations (Rome I), which requires EU member states to give effect to the parties' choice of law and therefore aligns the UK with its European neighbours.  Gibbs is perhaps not as big an outlier as some critics seem to suggest.

Act in haste, repent at leisure…

Clearly, Article X raises a whole host of difficult legal questions and its adoption could have far-reaching implications, not just for the English restructuring and insolvency market but also the English loans market, if the value of English law as an international law of choice wanes.  Various legal organisations, such as the City of London Law Society and the Insolvency Lawyers' Association, consider that further thought needs to be given before Article X is adopted into domestic law.  We agree that a prudent approach is needed.

Olga Galazoula, Partner and Global Head of Restructuring and Special Situations, says:

"The rule in Gibbs has been good law for more than 130 years.  Deciding if, when and how to repeal it should not be undertaken lightly, especially when Gibbs helps to provide the legal certainty which gives English law, and the English courts, their international appeal.  Our friends across the pond may dislike it, but we very much consider it a fundamental tenet of the attractiveness of English law for those that decide to govern their legal obligations pursuant to it.  We welcome the Government's decision to take some more time to consider the UNCITRAL Model Law on Recognition and Enforcement of Insolvency-Related Judgments before rushing into a premature adoption of Article X."

_{1. Antony Gibbs Sons v La Société Industrielle et Commerciale des Métaux (1890) LR 25 QBD 399
2. [2012] UKSC 46}