THE GIBBS PRINCIPLE

Citation(2017) 29 SAcLJ 42
Date01 December 2017
Published date01 December 2017

A Tether on the Feet of Good Forum Shopping

There is a pressing need to reopen debate on whether the principle articulated in Antony Gibbs & Sons v Société Industrielle et Commerciale des Métaux(1890) 25 QBD 399 remains relevant or useful in modern cross-border insolvency law. Criticism has been levied against the Gibbs principle both judicially and in academia, primarily on the ground that it cleaves to the outmoded philosophy of territorialism in cross-border insolvency and should finally be discarded in the light of the modern thrust toward modified universalism. This article will examine the arguments against the Gibbs principle and the tension between the principle and the growing acceptance of good forum shopping in cross-border insolvency. Significant benefits for both debtors and creditors are generated if they are allowed to engage in bona fide forum shopping for insolvency proceedings in order to avail themselves of juridical advantages available in foreign jurisdictions. Yet the Gibbs principle poses an impediment to good forum shopping by preventing recognition of debt discharge where the debt is governed by a law other than that of the insolvency jurisdiction. This is an urgent problem for corporations that borrow internationally and in multiple jurisdictions, and therefore incur debts under a plethora of national laws. The Gibbs principle is a relic of a different legal and economic era that ought to be consigned to the annals of history. In its place, a new approach will be proposed.

I. Introduction

1 The principle of modified universalism in cross-border insolvency law is no longer a fresh or novel concept. It has at its essence the idea that bankruptcy proceedings (corporate or individual) should be unitary and universal, recognised internationally and effective in respect of all the bankrupt's assets. It lies at the core of the 1997 UNCITRAL Model Law on Cross-Border Insolvency (“Model Law”) and the European Union's Council Regulation (EC) No 1346/2000 of 29 May 2000 on insolvency proceedings (“EU Insolvency Regulation”) which came into effect in 2002, more than a decade ago. It is safe to say that there is today a broad international consensus amongst insolvency practitioners and indeed many jurists that a comprehensive realisation of the principle of modified universalism is the way forward for cross-border insolvency. But features of the old philosophy of territorialism in cross-border insolvency remain bunkered within the common law. It continues to provide the juridical basis for certain rules which courts occasionally continue to recognise as good law.

2 One of these common law rules, which is the focus of this article, is the principle articulated by the English Court of Appeal in Antony Gibbs & Sons v La Société Industrielle et Commerciale des Métaux1 (“Gibbs”). For ease of reference, this will be called “the Gibbs principle”. Despite its vintage, the Gibbs principle continues to hold sway in cross-border restructuring and plague this area of law and practice.

3 The purpose of this article is to reopen debate on whether the Gibbs principle remains a relevant or useful rule in modern cross-border insolvency law. In short, does it have any relevance in the new global economic paradigm? It is suggested that it does not. Criticism has been levied against the Gibbs principle both judicially and in academia. The Gibbs principle cleaves to the outmoded philosophy of territorialism in cross-border insolvency and should finally be discarded in the light of the modern thrust towards modified universalism. This article will focus in particular on the problems posed by the Gibbs principle to the growing trend of good forum shopping.

II. The Gibbs principle

4 The defendant in Gibbs was a French trading company. It entered into contracts governed by English law to purchase copper from the plaintiff. The defendant ran into financial difficulties and was unable to accept further copper from the plaintiff. Eventually, the defendant

went into liquidation in France. The plaintiff submitted a claim in the French liquidation for damages in respect of the loss sustained on resale of the copper. The liquidator rejected that part of the plaintiff's claim in respect of the copper due to be delivered after the judgment of liquidation, on the basis that such a claim was not admissible under French law. The plaintiff commenced proceedings in the English courts. On appeal, the defendant contended that under French law, the judgment of liquidation operated as a discharge of the debt.

5 The Court of Appeal unanimously rejected this argument. Lord Escher MR delivered the principal judgment of the court. He emphasised that the law of the contract was English law. The parties had never agreed to be bound by French law, including French insolvency law. Therefore, the French liquidation did not discharge the debt owed by the defendant, and the plaintiff was entitled to maintain its action upon the English contracts.

6 Accordingly, the Gibbs principle, as stated in Dicey, Morris & Collins on the Conflict of Laws2 (“Dicey”), is that a discharge of any debt or liability under the bankruptcy law of a foreign jurisdiction is a discharge therefrom in England if, and only if, it is a discharge under the law applicable to the contract. Along similar lines, a foreign composition is not regarded as effective unless it operates as a discharge according to the law of the debt.3

A. Continued application of the Gibbs principle in England

7 The Gibbs principle remains good law in England. But there have been rumours of disquiet and misgivings from the English High Court. Unfortunately the fact remains that Gibbs is a decision of the Court of Appeal and is therefore binding on the English High Court.

8 A fairly recent example is the 2011 decision of Mr Justice Teare in Global Distressed Alpha Fund 1 Limited Partnership v PT Bakrie Investindo4 (“Bakrie”). The defendant, an Indonesian company, was the guarantor of certain notes issued by a company owned by the defendant. Subsequently, the defendant filed an application for a provisional moratorium of payments with the Indonesian court. The Indonesian court later also ratified a debt reorganisation composition plan in respect of the defendant. The claimant purchased some of the notes and

commenced English proceedings against the defendant on its guarantee. It argued that the guarantee, which was governed by English law, had not been discharged by the Indonesian composition plan. The defendant urged the court to give effect to the principle of modified universalism and depart from the Gibbs principle.

9 Mr Justice Teare found himself between a rock and a hard place. He noted the intense criticism of the Gibbs principle by various leading academics and admitted that there was “much to be said for developing English law in the manner suggested by [counsel for the defendant]”.5 But he was ultimately unable to avoid an application of the Gibbs principle because he was precedentially bound by Gibbs as it was a decision of the English Court of Appeal. Mr Justice Teare's decision eventually came before the High Court of Singapore, when the claimant sought to register the judgment for enforcement in Singapore. The ensuing proceedings will be described later in this article.

10 Another example is AWB Geneva SA v North America Steamships Ltd6 (“AWB”). There the applicants sought an anti-suit injunction to restrain a debtor's foreign trustee in bankruptcy from seeking an order in ongoing Canadian insolvency proceedings that certain conditions precedent in liability, under a contract between the applicants and the debtor governed by English law, should cease to apply. Field J held7 that it did not follow from the mere fact that an English court would not recognise the discharge of a contractual obligation in foreign liquidation proceedings that the court would grant an anti-suit injunction to restrain a party to the contract from bringing such proceedings. Accordingly, Field J rejected the application. There therefore appear to be limits to what the English courts are willing to countenance under the Gibbs principle.

11 Gibbs was applied recently in the 2016 decision of Mr Justice Snowden in Re Indah Kiat International Finance Co BV.8 The applicant sought an order convening a meeting of its creditors for the purpose of considering and approving a scheme of arrangement under English law. The applicant owed debts under certain notes that it had previously issued, all of which were governed by New York law. Neither the applicant nor its parent company had any connection with England, save that the applicant's centre of main interests (“COMI”) had been

shifted to England from the Netherlands about three months before the application for the sole purpose of promoting the scheme.

12 Prior to its application to the English High Court, the applicant had obtained an Indonesian judgment purporting to invalidate the notes and the obligations of the applicant and its parent. But the problem for the applicant and its parent was that the Indonesian judgment had not been given under the governing law of the notes. Though Mr Justice Snowden did not make express reference to the Gibbs principle, he implicitly did so when he expressed the view9 that there was “no doubt” that the Indonesian judgment would therefore not have the effect of discharging the debts owed under the notes. It is clear that Gibbs remains alive and well in English jurisprudence. It would not be unfair to assume that he, like Mr Justice Teare in Bakrie, felt burdened by precedent to apply the Gibbs principle.

B. International reception to the Gibbs principle

13 Internationally, the Gibbs principle has met with a mixed reception amongst national courts. This article will begin with the approach taken by the courts in Hong Kong.

14 A marked reluctance to give effect to Gibbs was expressed by Anselmo Reyes J in Hong...

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