The New Model Law—goodbye to Gibbs?

 

Sarah Clarke at Hardwicke Chambers looks at the new UNCITRAL Model Law on the Recognition and Enforcement of Insolvency Related Judgments and its potential impact on Re Gibbs and Ruben v Eurofinance, if it was adopted by the UK.

Introduction

The UNCITRAL Model Law on the Recognition and Enforcement of Insolvency Related Judgments (the New Model Law) is intended to fill the gaps that currently exist in cross border conventions as they apply to the recognition and enforcement of judgments in insolvency proceedings.

  • As noted by the UNCITRAL working group, very few states have recognition and enforcement regimes which address insolvency related judgments, and none have a regime which covers all the orders that might be made in insolvency proceedings (see Working Group Report, para 16)  
  • The Hague Conference Convention on Choice of Court Agreements 2005 does not apply to ‘insolvency, composition and analogous matters’ (see Article 2 (2) (e) of Hague Conference Convention on Choice of Court Agreements)  
  • The Model Law on Cross-Border Insolvency (the Model Law on Insolvency), which was enacted in the UK as the Cross Border Insolvency Regulations 2006 (CBIR) deals with:
    • Access—namely the right of foreign creditors to participate in insolvency proceedings within the UK  
    • Recognition—of foreign insolvency proceedings and associated relief  
    • Co-operation—between courts; and  
    • The co-ordination of concurrent proceedings in different states

In the UK, following the decision in Ruben v Eurofinance SA [2012] UKSC 46, the Model Law on Insolvency is regarded as dealing with procedural matters, and does not extend to the recognition and enforcement of foreign judgments. It now is clear from the Guide to Enactment which accompanies the New Model Law, that UNCITRAL did not intend the Model Law on Insolvency to be so limited. In Article X to the New Model Law, UNCITRAL propose an additional provision to clarify that the relief available under Article 21 of the Model Law on Insolvency does include the recognition and enforcement of a judgment in order to reverse the effect of Ruben and judgments with similar effect in other states. As the UK has not yet taken legislative steps to adopt this proposed amendment, Ruben continues to be authority for the meaning and effect of the CBIR.

Current Status of the New Model Law

The New Model Law was approved by UNCITRAL on 2 July 2018 and endorsed by resolution of the General Assembly of the UN on 20 December 2018.

  • the New Model law has no direct effect; it must be adopted by a state and enacted by domestic legislation   
  • it is a free standing piece of legislation which is capable of being enacted on its own or as a supplement to the existing Model Law on Insolvency  
  • it contains no reciprocity criteria, so a state which has adopted the New Model Law will be obliged to apply it to applications to enforce judgment made by any other state, whether it has adopted the New Model Law or not

Key Provisions and features of the New Model Law

In summary:

  • in the interests of harmonisation, the New Model Law eschews terms used in other legislation to encourage the courts to interpret its provisions by reference to the New Model Law itself, not other legislation (see New Model Law Guide to enactment para 20) 
  • the New Model Law applies to foreign judgments (or parts of judgments which can be severed, see New Model Law, article 16) that:
    •  arise from or are associated with insolvency proceedings; (even an insolvency proceedings which has concluded) and 
    • were issued on or after commencement of the proceeding (see New Model Law, Article 2(d)(i))
  • it does not apply to:
    • an order by which an insolvency proceeding was commenced (see New Model Law, Article 2(d)(ii)) 
    • interim measures of protection, ie freezing injunctions (see Article 2(c), Guide to enactment para 54–55) or 
    • elements imposing a criminal penalty (see Guide to enactment para 57)
  • enacting states are able to carve out additional exceptions to the scope of the Model Law (see New Model Law, Article 1 (2))  
  • in general, the obligation to recognise and enforce insolvency related judgments is mandatory (see New Model Law, Article 12) 
  • however, the courts would have the discretion not to enforce a foreign judgment the circumstances identified in New Model Law, Article 14, namely where the foreign judgment:
    • does not meet procedural requirements as to notice (see New Model Law, Article 14(a)) 
    • was obtained by fraud (see New Model Law, Article 14(b)) 
    • is inconsistent with an earlier decision of another court on the same matter and with the same parties (see New Model Law, Articles 14(c) and (d)) 
    • would, if recognised, interfere with domestic insolvency proceedings (see New Model Law, Article 14(e)) 
    • materially affects the rights of creditors generally, without the proceedings having offered adequate protection to the interests of creditors and other interested parties (see New Model Law, Article 14(f)) 
    • was given in proceedings which did not satisfy one of the following jurisdictional conditions (safe harbours)

(i) explicit consent to jurisdiction by party

(ii) participation in proceedings by the party

(iii) the foreign originating court exercised jurisdiction on a basis upon which receiving court could have exercised jurisdiction; or

(iv) the originating court exercised jurisdiction on basis not incompatible with law of this state (see New Model Law, Article 14(g))

  • was issued by a state whose insolvency proceedings are not entitled to recognition under Model Law on Insolvency (with exceptions) (see New Model Law, Article 14(h))

The Rule in Gibbs

 

In summary:

 

  • from the UK’s perspective, one of the more challenging aspects of the New Model Law is the effect it would have on the longstanding, but controversial, common law principle known as ‘the Rule in Gibbs’  
  • the rule in Gibbs is the principle, identified in Antony Gibbs & Sons v La Societe Industrielle et Commerciale des Metaux [1890] 25 QBD 399, that a contract governed by the law of one country can only be discharged in accordance with the law of that country. In practice, the effect of this rule is that debts arising from contracts governed by the laws of England and Wales cannot be discharged as a consequence of insolvency proceedings in another state. The rule is applauded by many for offering commercial parties certainty of choice and protection from forum shopping. It also has many detractors, who criticise the rule for impeding comity in insolvency proceeding and inhibiting legitimate forum shopping  
  • as the judgments which are intended to fall within New Model Law would include judgments which deal with the discharge of a debt, the mandatory recognition and enforcement provision, if applicable would overrule the rule in Gibbs, however:
    • if it was the will of Parliament, it would be possible for any legislation enacting the New Model Law to incorporate a carve out provision in order to preserve the rule in Gibbs 
    •  alternatively, even if the New Model Law was enacted without modification, it remains to be seen whether the court would have the discretion to refuse to enforce a decision which was contrary to the Rule in Gibbs. One possible basis might be on grounds that the foreign proceedings did not satisfy one of the jurisdictional safe harbours referred to in Article 14 of the New Model Law

Supporters of the rule may therefore take comfort that the adoption of the New Model Law would not inevitably require the UK to say goodbye to Gibbs.

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


 

Relevant Articles
Area of Interest