UK consultation on UNCITRAL model law on "judgments" - do the proposals go far enough?

Abstract

This article considers the UK government’s recently launched consultation on the implementation of the "UNCITRAL Model Law on Recognition and Enforcement of Insolvency-Related Judgments". It outlines that the UK favours a "discretionary" route to recognition under Article X of the model law, rather than automatic recognition. Importantly, implementation of the model law will enable English courts to ignore the Supreme Court’s decision in Rubin and another v Eurofinance SA and others and instead enforce "substantive" insolvency judgments obtained by overseas officeholders under Article 21 of the Cross-Border Insolvency Regulations. However, as the article goes on to explain, the UK government does not intend to abolish the "rule in Gibbs" – which currently curtails the English courts’ ability to give effect to non-UK statutory compromises affecting English law-governed contracts.

On 7 July 2022 the United Kingdom Insolvency Service announced a consultation on the proposed implementation of two model laws adopted by the United Nations Commission on International Trade Law (UNCITRAL) relating to the recognition of insolvency-related judgments, and the cross-border management of enterprise group insolvencies. The Model Law on Recognition and Enforcement of Insolvency-Related Judgments (MLIJ) addresses the cross-border recognition of judgments arising out of insolvency proceedings. Meanwhile the Model Law on Enterprise Group Insolvency (MLEG) relates to the cross-border management and coordination of group insolvency situations.

The MLIJ and MLEG complement and expand upon the Model Law on Cross-Border Insolvency (MLCBI), which has been implemented by 48 states worldwide, including the UK. While the MLIJ and MLEG were adopted by UNCITRAL in 2018 and 2019 respectively, they have not yet been implemented by any UNCITRAL member states. Being among the first states to consider their implementation will, according to the consultation, signal the UK’s ongoing commitment to "mutual cooperation and international best practice". Of course, since leaving the European Union, the UK has had a particular interest in promoting wider uptake of the model laws on insolvency as it no longer benefits from the system of recognition set out in Regulation (EU) 2015/848 on insolvency proceedings (recast) (the "Recast Regulation").

This article focuses on the proposed implementation of the MLIJ in the UK. Increased certainty in this area will be of particular interest and assistance to non-UK officeholders seeking to enforce in the UK any judgments related to insolvency proceedings obtained in their local jurisdiction. However, the proposals will not have the effect of overturning the much-criticised "rule in Gibbs", which constitutes a common law barrier to the recognition of foreign law restructuring of English debt.

Recognition and relief under the MLCBI

The MLCBI, as implemented in the UK in 2006 and 2007 in the form of the Cross-Border Insolvency Regulations 2006 (SI 2006/1030) (CBIR), provides a well-established framework for recognition of foreign insolvency proceedings in the UK. To obtain recognition of a foreign insolvency proceeding, a foreign officeholder must make an application to the UK court. Assuming the requirements set out in the CBIR are met, the English court will recognise the foreign proceeding, either as a foreign main proceeding (if taking place in the jurisdiction where the debtor has its centre of main interests) or a foreign non-main proceeding (if taking place in a jurisdiction where the debtor has an establishment).

In the case of a foreign main proceeding, recognition leads to an automatic stay, pursuant to Article 20 of the CBIR. In relation to both main and non-main proceedings, recognition also opens the door to the grant of other discretionary relief "where necessary to protect the assets of the debtor or the interests of its creditors", pursuant to Article 21. The relief available to a foreign officeholder under this article might include, for example, an extension of the automatic stay in relation to main proceedings (or the grant of a stay in relation to non-main proceedings), provision for the examination of witnesses or granting "any additional relief that may be available to a British insolvency officeholder".

However, although Article 21 apparently gives the court a wide discretion to grant "any appropriate relief", in practice the courts have found this discretion to be constrained. In particular, the Supreme Court in Rubin and another v Eurofinance SA and others and New Cap Reinsurance Corporation (in liquidation) and another v Grant and others [2012] UKSC 46 held that although the type of relief available under Article 21 should be widely construed, it was of a procedural nature rather than a substantive one. There was nothing in the wording of the MLCBI to suggest that Article 21 should extend to the recognition and enforcement of foreign judgments against third parties, and indeed it would be "surprising", in the words of Lord Collins, if it had been intended to deal with the enforcement of judgments without express provision to that effect.

"Insolvency-related judgments"

The MLIJ constitutes a free-standing model law, which is independent of but complementary to the MLCBI. It sets out a system for recognition of "insolvency-related judgments", defined in the MLIJ as judgments arising as a consequence of, or "materially associated" with, an insolvency proceeding, and issued on or after the commencement of that insolvency proceeding. Judgments commencing insolvency proceedings (dealt with in the MLCBI) are excluded.

The guidance notes to the MLIJ give examples of the type of judgments that could fall within the scope of the definition of "insolvency-related judgments". These include judgments dealing with the constitution and disposal of assets of the insolvent estate; judgments relating to the avoidance of prior transactions (preferences or transactions at an undervalue); judgments relating to the liability of directors for action taken when the debtor was insolvent or in the period approaching insolvency; and judgments confirming a plan of reorganisation or approving a voluntary or out-of-court restructuring agreement.

Judgments that meet the criteria set out in the MLIJ must be recognised by the court in an enacting state, provided that they are not manifestly contrary to that state’s public policy and none of certain specified grounds for refusal apply. Article 14 of the MLIJ sets out the grounds upon which a court may refuse to recognise a judgment. These grounds include where the judgment was obtained by fraud; where it is inconsistent with a judgment issued in that state regarding the same parties; or where it materially affects the rights of creditors generally, such as determining whether a plan of reorganisation be approved.

An application for recognition pursuant to the MLIJ may be made either by an insolvency representative or any person entitled under the law of the originating state to seek recognition and enforcement, such as a creditor whose interests are affected by the judgment. There is no requirement for the insolvency proceeding to which the judgment relates to have been recognised itself.

"Article X"

The text of the MLIJ also contains a separate provision intended to address the uncertainty regarding the ability of courts in some states (following Rubin and other similar decisions) to recognise and enforce judgments given in foreign insolvency proceedings pursuant to the MLCBI. This "Article X" makes it clear that the relief available under Article 21 of the MLCBI includes the recognition and enforcement of an insolvency-related judgment. The guidance notes state that "Article X" is not intended to be enacted as part of legislation enacting the MLIJ itself, but could, for instance, be enacted as an amendment to legislation giving effect to the MLCBI.

"Article X" brings the recognition of judgments firmly within the parameters of Article 21 of the MLCBI,  retaining the discretion of the court as to the grant of relief. This stands in contrast to the largely mandatory system of recognition under the MLIJ. Relief may only be sought in relation to judgments arising out of insolvency proceedings that have already been recognised in the relevant state pursuant to the law enacting the MLCBI. Furthermore, an application for relief pursuant to Article 21 may only be made by the foreign officeholder themselves, not by an affected creditor. In summary, "Article X" simply clarifies the relief available under the existing Article 21, rather than introducing a new free-standing system of recognition of judgments.

The UK government proposes to implement "Article X", rather than the full system of recognition provided by the MLIJ. The consultation notes that implementation of Article X alongside the full text of the MLIJ would effectively create two different systems for recognition and enforcement of insolvency-related judgments, leading to confusion and duplication. The government also wishes to minimise the impact on the existing legal framework and to avoid fettering the discretion of the courts regarding recognition of foreign judgments.

The direct effect of implementing "Article X" will be to set aside the decision of the Supreme Court in Rubin regarding the relief available under Article 21 of the CBIR. "Article X" makes it clear that "notwithstanding any prior interpretation to the contrary", the relief available includes the recognition and enforcement of judgments. To address the question of whether the court should recognise a judgment pursuant to Article 21 (as clarified by "Article X"), the government proposes to set out a non-exhaustive list of factors that the court may consider in coming to its decision, based upon the grounds for refusal to recognise a judgment as set out in Article 14 of the MLIJ.

The rule in Gibbs

The proposed implementation of "Article X" will not, however, impact the longstanding English common law rule which holds that a contractual liability may only be compromised or discharged by the proper law of the contract, or where the creditor agrees to the foreign law discharge (commonly referred to as the "rule in Gibbs", after the 19th-century Court of Appeal case in which it was elucidated[i]). So, for example, in Gunel Bakhshiyeva v Sberbank of Russia and Others [2018] EWCA Civ 2802, the Court of Appeal found that the procedural relief available under Article 21 did not empower the UK court to circumvent the rule in Gibbs. In that case the court refused to impose a permanent stay on enforcement, which would bind creditors in relation to their English-law debt beyond the close of the Azerbaijani restructuring proceedings recognised as main proceedings pursuant to the CBIR.

The rule in Gibbs has been subject to widespread judicial and academic criticism both in the UK and abroad as being anachronistic and incompatible with the concept of modified universalism generally favoured, including by the English courts, in relation to modern cross-border insolvency (and as is espoused in the Recast Regulation and the MLCBI itself). The government recognises the difficulties caused by the rule in Gibbs for foreign companies seeking to restructure English law debts in their native jurisdiction. It notes that in insolvency situations the rule can lead to "convoluted and inefficient results" – as in Bakhshiyeva, where the refusal to grant a stay resulted in the Azerbaijani proceedings having to remain open indefinitely. The government will be aware, of course, that the rule in Gibbs is starkly at odds with the robust "universalist" approach taken by, for example, the United States federal bankruptcy courts, which will willingly grant permanent injunctions enforcing the terms of non-US restructuring regimes that purport to bind US-based creditors whose claims are governed by the law of a US state.

Despite these considerations, preservation of the rule in Gibbs is apparently a key consideration for the UK government in proposing to implement "Article X" rather than the full MLIJ. Implementing the full text would not necessarily set aside the rule in Gibbs in totality, due to the grounds for refusing recognition retained by Article 14 – notably where a judgment "materially affects the rights of creditors generally". Nevertheless, the government is concerned that implementing the full MILJ would "undermine" the rule and enable it to be overridden in those cases where none of the Article 14 exceptions apply. Perhaps more positively, the consultation indicates that the impact of the rule in Gibbs will be re-examined in due course, at which point affected parties will be given the opportunity to make representations. Whether a substantive alteration to the rule in Gibbs will result, and what form that will take, remains to be seen.

In any event, although it is disappointing that the government is not currently proposing to take this opportunity to consign the rule in Gibbs to the dustbin of history, the overturning of Rubin and clarification of the CBIR is likely to be broadly welcomed. It will bring increased certainty for non-UK officeholders seeking recognition and enforcement of judgments in the UK – which might be particularly welcomed by European officeholders in the post-Brexit environment. Primary legislation is not required to enact the proposals (in relation to "Article X" or the MLEG), and therefore they may be brought into force in relatively short order following the consultation period. Replies to the consultation are sought by 29 September 2022.