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Creditors win protection in relation to foreign restructuring


The Court of Appeal has confirmed that procedural powers under the Cross-Border Insolvency Regulations 2006 (“CBIR”) cannot be used to deprive creditors of substantive rights governed by English law. That is the effect of the Court of Appeal’s decision this week

in Bakhshiyeva (in her capacity as the Foreign Representative of the OJSC International Bank of Azerbaijan) v Sberbank and others.

Sberbank is a creditor of the International Bank of Azerbaijan (“IBA”). Its rights under the facility agreement are governed by English law.  In 2017 IBA entered into a restructuring proceeding (similar in nature to US Chapter 11 proceedings) that resulted in the Azeri court sanctioning a plan that cancelled certain debts, including the debt owed to Sberbank, and replacing them with new debt instruments. The plan was implemented in 2017 and IBA was restored to financial health.

As a matter of English law, the Azeri plan does not affect Sberbank’s English law rights under the facility agreement – that is a result of the long-standing Gibbs rule (which takes its name from an 1890 Court of Appeal decision).

Against that background, IBA’s foreign representative applied to the English court for an order under CBIR article 21 seeking an indefinite stay of creditors’ claims – this was designed to prevent Sberbank and other creditors from enforcing their claims, notwithstanding that their rights are unaffected as a matter of English law. Hildyard J dismissed IBA’s application in December 2017 and the Court of Appeal has today upheld that decision, confirming that there is no jurisdiction under the CBIR to grant the stay sought.

The Court of Appeal held in summary:

  1. The power to order a stay under CBIR article 21 is procedural in nature and is intended to provide a temporary breathing space to a debtor pending the conclusion of a foreign restructuring. That procedural power cannot be used to circumvent the Gibbs rule or otherwise interfere with creditors’ substantive rights.
  1. Nor can relief under CBIR article 21 be granted on an indefinite basis so as to continue beyond the date of termination of the foreign proceeding.

The decision will provide considerable comfort to creditors whose rights are governed by English law in confirming that, where the debtor is subject to a foreign restructuring, the English courts will not allow creditors’ substantive rights to be abrogated by means of procedural powers under the CBIR. The decision also serves as a reminder of the limits to the principle of “modified universalism” in cross-border insolvency.

A link to the judgment is here.

Mark Howard QC and Fred Hobson acted for Sberbank, instructed by Fried, Frank, Harris, Shriver & Jacobson (London) LLP.   Laura Newton also advised Sberbank prior to the appeal.