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Effect of foreign insolvency on English law governed guarantee

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Amy Edwards

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15 March 2011

Global Distressed Alpha Fund 1 LP v PT Bakrie Investindo [2011] EWHC 256 (Comm)

In Global Distressed Alpha Fund 1 LP v PT Bakrie Investindo, Teare J, in Commercial Court proceedings, has implicitly criticised the current English law rule, based on the Court of Appeal case of Gibbs & Sons v Societe Industrielle et Commerciale de Metaux [1886-90] All ER Rep 804 (Gibbs), that a guarantee, governed by English law, cannot be discharged by foreign insolvency arrangements.

Teare J, agreeing with the defendant, observed that there was much to be said for developing English insolvency law by giving effect to the general principle of "modified universalism" whereby a court could recognise such proceedings as discharging a guarantee. However, Teare J held that while recent decisions of the Privy Council, House of Lords and Court of Appeal enabled an argument to be advanced that the decision in Gibbs may justifiably be overruled, it was not open to him to overrule the decision at first instance. Permission to appeal was granted.

The principle of universalism in this context means a unitary insolvency proceeding in the court of the debtor's domicile which receives worldwide recognition and which should apply universally to all the debtor's assets.

The issues arose in this claim, brought by a distressed debt fund, against the defendant, an Indonesian company. The defendant was the guarantor of certain notes issued by a Dutch company in 1996, and purchased by the claimant in 2009. The guarantee was governed by English law. In 2002 the Central Jakarta Court had ratified a debt reorganisation composition plan (the Plan) in respect of the defendant.

Despite accepting that, as a matter of Indonesian law, the guarantee had been discharged by the Plan, the claimant commenced English proceedings seeking to enforce the guarantee. Relying on the Gibbs case the claimant argued that, as a matter of English law, the Plan had not discharged the defendant's liability under the guarantee. The defendant argued that, following Cambridge Gas Transportation Corp v Official Committee of Unsecured Creditors of Navigator Holdings plc & ors [2007] 1 AC 508, Re HIH Casualty & General Insurance Ltd [2008] 1 WLR 852 and Rubin v Eurofinance [2010] EWCA Civ 895 (see December 2010 Litigation Review), the English court should recognise and give effect to the discharge of the guarantee. In Rubin the Court of Appeal considered whether the principle of universality enabled the court to enforce a judgment in personam which had been given in New York against the defendants in and for the purposes of bankruptcy proceedings in New York, notwithstanding that the defendants had not submitted to the jurisdiction of the New York court. The Court of Appeal held that the principle had that effect:

"The ordinary rules for enforcing, or more precisely not enforcing, foreign judgments in personam do not apply to bankruptcy proceedings" (per Ward LJ at paragraph 61).

The Court of Appeal regarded Cambridge Gas and HIH Insurance as stating the general principle of universality which carried with it the active assistance of the court. The defendant relied upon Rubin and submitted that, just as the principle of universality enabled the Court of Appeal in that case to disregard the previous law dealing with the circumstances in which a foreign judgment in personam may be enforced where bankruptcy was involved, so the same principle enabled Teare J to disregard the decision in Gibbs and recognise the Plan.

The defendant further argued that, were the court to take this step, the common law would be brought into line with the Insolvency Regulation (Council Regulation (EC) No 1346/2000), the Cross Border Insolvency Regulations 2006 and US law (see Canada Southern Railway Co v Gebhard [1883] 109 US 527).

Teare J, however, reluctantly held for the claimant, on the basis that he was bound by the Court of Appeal's decision in Gibbs. However, his per curiam statement evidenced a belief that the Gibbs rule is out of date, and should be abandoned.

Comment: Permission to appeal this decision has been granted so it seems extremely likely that the defendant will seek to challenge the Gibbs rule in a court with the authority to overrule it. The economic argument against Gibbs is that, whilst a foreign insolvency proceeding purports to bind a debtor's assets in England, the effect of Gibbs is that the debtor, potentially stripped of the control of its assets by the foreign insolvency, can still be made liable under an English law governed contract.

Proponents of the Gibbs approach will argue that, where parties have elected that their contract be governed by a particular law, foreign insolvency proceeding should not have the effect of trumping this choice of law. Professor Briggs, in his case note on Rubin [2010] LMCLQ 523, has questioned that decision and noted that "if insolvency really is different, its boundaries will need to be surveyed and mapped".

It is not likely to be until the end of this year that the Supreme Court will be hearing the Rubin appeal, but the stage is certainly set for some interesting legal analysis on the extent to which universalism should apply.

Further Information

This case summary is part of the Allen & Overy Litigation Review, a monthly update on interesting new cases and legislation in commercial dispute resolution.  For more information please contact Sarah Garvey, or tel +44 (0)20 3088 3710.