End in Sight for the “Rule in Gibbs”? UK Consults on New UNCITRAL Model Laws

At a Glance

Proclaiming the UK’s commitment to international co-operation in respect of insolvency proceedings and the sponsoring of international best practice, the UK Insolvency Service today launched a public consultation which proposes to adopt:

• a modification to the UNCITRAL Model Law on Cross-Border Insolvency (the Original Model Law) which would facilitate the recognition and enforcement of insolvency-related judgments (via a provision known as “Article X”) – though stopping short of overturning the long-standing “rule in Gibbs" (that any discharge of, or variation to, a contractual obligation must be governed by the proper law of the contract)¹; and
• the UNCITRAL Model Law on Enterprise Group Insolvency (the Group Model Law), which provides tools to manage and co-ordinate insolvencies within corporate groups, while respecting that each company remains a separate legal entity. 

The UNCITRAL Model Law on Recognition and Enforcement of Insolvency-Related Judgments (the Judgments Model Law) is a separate model law providing for recognition of foreign insolvency-related judgments (which would include foreign plans of reorganisation compromising English law debt, thereby effectively overturning the “rule in Gibbs”). Today’s consultation announces that the Insolvency Service does not consider it appropriate to implement the Judgments Model Law in full at the present time, to avoid “as yet unanticipated effects” upon domestic contract law.² Instead, the Insolvency Service will issue a further call for evidence on the “rule in Gibbs” in due course.

If the UK does implement Article X or the Group Model Law into national law, it would be the very first jurisdiction to do so. 

Next steps

The consultation closes on 29 September 2022. Given the paralysis in UK Government, the timeframe for further action is uncertain. Any reform would be effected via secondary legislation (i.e., without requiring an Act of Parliament).³ The Government proposes to implement the Group Model Law “as soon as possible”.

We are happy to discuss this further with interested clients.

For full details, see our detailed deck on the consultation. 

^{1. More specifically, the English law “rule in Gibbs” provides that, where a contract specifies that it is governed by a particular country’s law, it cannot be compromised or discharged by insolvency proceedings under a different law (stemming from the case of Antony Gibbs & sons v La Société Industrielle et Commerciale des Métaux (1890)) – unless the affected parties have taken part in the proceedings or otherwise submitted to them (e.g., by voting) or were present in the foreign jurisdiction when the proceedings were commenced. This effect was recently illustrated in OJSC International Bank of Azerbaijan (2018), when certain creditors with debts governed by English law did not participate in the Azeri restructuring proceeding and – based on the “rule in Gibbs” – successfully opposed the granting of a permanent moratorium (which would have effectively amounted to a permanent compromise of their claims). ↩}

^{2. The consultation specifically references concerns regarding financial contracts (such as those governing international swaps and derivatives), and the certainty that the rule in Gibbs provides to contracting parties ↩}

^{3. Pursuant to a power in the Private International Law (Implementation of Agreements) Act 2020 ↩}