Court dismisses Azerbaijan foreign representative’s application for permanent moratorium (Bakhshiyeva v Sberbank of Russia and others)

The Companies Court has dismissed an application by the OJSC International Bank of Azerbaijan for what was considered, in effect, to be a permanent moratorium against English law-based creditor claims against the bank. Justin Michaelson, partner, and Simon Camilleri, associate, Fried, Frank, Harris, Shriver & Jacobson (London) assess the implications of the decision.

Original news

The rule in Gibbs & Sons v Société Industrielle et Commerciale des Métaux [1890] 25 QBD 399, 59 LJQB 510, [1886-90] All ER Rep 804, which stated that a debt governed by English law could not be discharged by a foreign insolvency proceeding, remained good law. The Companies Court so held in dismissing an application by the foreign representative of the OJSC International Bank of Azerbaijan for what was considered, in effect, to be a permanent moratorium against English law-based creditor claims against the bank, in circumstances where the foreign restructuring proceeding concerning the bank had been recognised as a foreign main proceeding, under the Cross-Border Insolvency Regulations 2006, SI 2006/1030, but was due to terminate on 30 January 2018.

What are the practical implications of this case?

This case is of significance to financial institutions, creditors or any commercial party with contracts governed by English law. As a result of this case, creditors with English law governed debts can receive comfort that a foreign insolvency process cannot be used to modify or compromise English law governed liabilities. Like a great number of other international parties, Sberbank selects English law as the governing law for cross-border transactions because of its reputation for neutrality and the certainty it provides, as well as the predictability of the English judicial system. This case confirms the reputation, predictability and commerciality of English law and the English judicial system. The decision will help to ensure that English law (and jurisdiction) remains one of the principal choices of law for commercial parties.

What was the background?

Sberbank is the sole lender under a $20m term facility agreement dated 15 July 2016 with the Association of International Bankers (IBA) as creditor. The relationship between Sberbank and IBA is governed by English law under terms of the facility agreement. In May 2017, IBA fell into financial difficulty and announced measures to stabilise its position through a voluntary restructuring process in Azerbaijan. This was followed, shortly after, by an application before the English court under SI 2006/1030 (which adopts into English law the UNCITRAL Model Law on Cross-Border Insolvency (the Model Law)) for an order recognising the Azeri proceedings as ‘foreign main proceedings’, within the meaning of the Model Law, together with a moratorium preventing any creditor action being taken against IBA in England and Wales.

IBA accepts that Sberbank did not participate in the Azeri restructuring process and Sberbank therefore maintained its right to payment under the facility agreement on the basis of, among other things, the protections afforded to it as a matter of English law. As a result, Sberbank applied for, among other things, an order permitting it to enforce its rights against IBA and also resisted IBA’s attempts to continue the moratorium granted by the English court indefinitely on the basis that such an indefinite continuation would be contrary to its rights as a creditor under English law.

What did the court decide?

The High Court confirmed that the long-established principle in Gibbs & Sons v Société Industrielle et Commerciale des Métaux [1890] 25 QBD 399, 59 LJQB 510, [1886-90] All ER Rep 804, remains good law, notwithstanding the implementation of SI 2006/1030. The Gibbs principle provides that the discharge of an English law governed debt under the insolvency laws of a jurisdiction outside of England and Wales is not a valid discharge of such debt as a matter of English law. The result of this was that IBA was not entitled to a permanent moratorium against creditor action in England and Wales, outlasting the existence of the voluntary restructuring in Azerbaijan.

Given the importance of the issues raised by the case, the judge has given permission to appeal to the Court of Appeal. Such appeal is likely to be heard in July or October 2018.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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