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Creditors’ Contractual Autonomy Does Not Triumph the Value of Bankruptcy Law as a Collective Dispute Resolution Mechanism

In a recent cross-border insolvency case, In re Agrokor d.d., 591 B.R. 163 (Bankr. S.D.N.Y. 2018), Judge Glenn of the United States Bankruptcy Court for the Southern District of New York recognized and enforced a restructuring plan approved by a Croatian court.  Due to the nature of the debt to be discharged under the plan, the Court went through an in-depth analysis of international comity in the context of international bankruptcy law.

In April 2017, Croatia enacted the so-called “the Law on Extraordinary Administration Proceeding in Companies of Systemic Importance in the Republic of Croatia”[1] (the “EA Law”).  The EA Law provides a specialized restructuring procedure that is available to entities of “systemic importance.”  The Agrokor Group, one of the largest companies in Croatia, and some of its affiliates (the “Debtors”) initiated a restructuring proceeding under the EA Law, shortly after it was enacted. 

Courts in different jurisdictions have disagreed as to whether to recognize under their laws Agrokor’s Croatian proceeding under the EA Law.  Courts in the following jurisdictions have declined to recognize the Croatian proceeding: Slovenia, Serbia, Federation of Bosnia and Herzegovina, and Montenegro.  Their primary rationale was that the EA Law puts Croatia’s interests ahead of the creditors’ interests.  In contrast, the courts of England and Wales, and Switzerland have recognized the proceeding. [2]  In addition, the Croatian proceeding has been recognized across the EU member states through a regulation issued by the European Parliament. 

The Debtors also filed Chapter 15 cases in the United States Bankruptcy Court for the Southern District of New York.  On September 21, 2018, the Court granted the Debtors’ request to recognize the Croatian proceeding under the EA Law as a “foreign main proceeding.”  Recently, the Court also granted the Debtors’ request to recognize and enforce the restructuring plan reached in the Croatian proceeding (the “Settlement Agreement”), which in substance is analogous to a plan of reorganization in a Chapter 11 case.  The Debtors had to make this additional request because the automatic relief accompanying the recognition of a foreign main proceeding under Chapter 15 did not include recognition and enforcement of the Settlement Agreement. 

In considering this request, the Court noted that additional discretionary relief available under Section 1507 could include recognition and enforcement of a restructuring plan reached in a foreign proceeding.  However, the Court could grant such relief only if that relief is consistent with the principles of comity and satisfies the fairness considerations set forth in Section 1507(b). 

The Court concluded that the substance and procedures of the Croatian proceeding under the EA Law comport with broadly recognized principles of insolvency law and satisfy the standards for due process.  In general, this conclusion would end a comity inquiry.  However, this inquiry here was complicated by the so-called Gibbs Rule that originates from an 1890 decision in Anthony Gibbs & Sons v. La Societe Industrielle et Commerciale des Metaux.  The Rule essentially holds that, where a debtor made a contract governed by English law and to be performed in England, the creditor is not bound by a discharge of debt under foreign law in a foreign proceeding and can recover damages in an English court.  The courts in England and Wales still apply this Rule. 

The Gibbs Rule was particularly relevant in the Agrokor case because about 64% of the debt to be restructured under the Settlement Agreement was governed by English law.  Here, the Court had to consider the Gibbs Rule because extending comity to the Croatian court’s approval of the Settlement Agreement could in effect constitute a refusal to extend comity to English law by refusing to honor the Gibbs Rule. 

Notwithstanding the Gibbs Rule, the Court ultimately granted comity to the Croatian court’s ruling within the territorial jurisdiction of the United States.[3]  In reaching this conclusion, the Court referred to an opinion of the Supreme Court of Singapore on the reach of the Gibbs Rule.  In Pacific Andes Resources Development Ltd., the Supreme Court of Singapore stated that the parties to a contract governed by the law of a jurisdiction adhering to the Gibbs rule should be assumed to expect that their claims might be discharged in proceedings in another jurisdiction where the debtor has an established connection based on residence or business ties.[4]  In the Court’s view, the Gibbs rule in essence embodies creditors’ contractual autonomy and the treatment of discharge of debt as a contractual issue, rather than a bankruptcy issue.  The Court opined that a creditor’s autonomy in contracting is relevant in the context of an insolvency proceeding only to the extent that it does not undermine the value of a bankruptcy proceeding as a collective debt restructuring mechanism. 


[1]  Official Gazette No. 31/17

[2]  Some of these recognition decisions have been appealed and are still pending. 

[3]  The Court implied that holders of the debt governed by English law still might be able to take advantage of the Gibbs Rule in England, depending on the English court’s decision on the Rule’s applicability. 

[4]  [2016] SGHC 210