December 18, 2018
Parties involved in cross-border bankruptcy/restructuring situations may be wary of the risk that repeated litigation in different courts with jurisdiction over the same debtor will result in conflicting judgments. The principle of “universalism” is the theory whereby the decisions of one primary jurisdiction addressing a debtor’s bankruptcy/restructuring issues are given universal effect by courts in other jurisdictions. The opposite concept is that of “territorialism,” in which the home jurisdiction determines what is in its best interest without regard to creditors in other jurisdictions. Under Chapter 15 of the Bankruptcy Code, U.S. courts generally lean towards “universalism” and recognize the need to extend comity to foreign bankruptcy proceedings. U.K. courts, in contrast, have trended towards the “territorialist” approach in applying the so-called “Gibbs” rule (discussed infra) to hold that only courts in England and Wales may modify English law-governed debt.
In keeping with the “universalism” principle, on October 24, 2018, the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) issued a decision holding that it was appropriate to extend comity within the territorial jurisdiction of the United States to recognize and enforce a Croatian settlement agreement which modified both New York and English law-governed debt, despite the fact that the settlement agreement might not be recognized under English law.
In April of 2017, Agrokor d.d. (“Agrokor”) commenced an extraordinary administration proceeding (the “Croatian Proceeding”) under a new Croatian law (the “EA Law”) applicable to systemically important companies. The EA Law includes provisions for the negotiation, acceptance by creditors, and approval by a Croatian court, of a settlement agreement (comparable to a plan of reorganization) (a “Settlement Agreement”) which adjusts the debt and ownership interests of distressed companies.
In July of 2018, Agrokor and eight affiliated debtors, through their appointed representative (the "Foreign Representative"), sought relief in the Bankruptcy Court under Chapter 15 of the Bankruptcy Code. At the outset, the Foreign Representative asked the Bankruptcy Court to recognize (i) the Croatian Proceeding as a “foreign main proceeding” and (ii) his own standing as the “foreign representative,” under Chapter 15. The Bankruptcy Court concluded that those requests presented “relatively straightforward” Chapter 15 issues, which could easily be approved.
In addition, the Foreign Representative sought to enforce the Settlement Agreement that had been approved by the requisite vote of creditors and then approved by the Commercial Court of Zagreb in Croatia. The Settlement Agreement contemplated the restructuring of Agrokor’s financial debt, a significant portion of which was governed by English law.
Recognition of the Croatian Proceeding and the Foreign Representative, by itself, would not mean that the orders issued by the Croatian court would be recognized by the Bankruptcy Court. Instead, under Chapter 15, additional relief such as enforcement of specific orders of the foreign court – here, the Croatian court’ s approval of the Settlement Agreement - may be granted at the Bankruptcy Court’s discretion, which largely depends on principles of comity.
The Bankruptcy Court held that, in contrast to the “relatively straightforward” issues around recognition of the Croatian Proceeding, recognizing and enforcing the Settlement Agreement within the territorial jurisdiction of the United States, including the provisions modifying English law-governed debt, “presents challenging issues with very practical consequences.” In considering the issues, the Bankruptcy Court observed that English courts relying on the Gibbs rule have held that courts outside of the United Kingdom (such as the Croatian court) lack the power to approve a discharge or modification of English law-governed debt, and, therefore, recognition and enforcement of the Settlement Agreement by a court in the United Kingdom might not be granted.  Nevertheless, the Bankruptcy Court held that recognition and enforcement of the Settlement Agreement within the territorial jurisdiction of the United States was appropriate under the facts of the case.
In analyzing whether to recognize and enforce the Settlement Agreement as approved by the Croatian court, the Bankruptcy Court first considered common law principles of comity. The Bankruptcy Court observed that the EA Law tracks closely to the structure of the U.S. Bankruptcy Code – in that creditors had the ability to participate meaningfully in the Croatian Proceeding, and creditor approval of the Settlement Agreement was required – and thereby found that the EA Proceeding was procedurally fair. Moreover, the Bankruptcy Court found that (i) the creditor distributions approved in the Settlement Agreement closely followed the waterfall provisions of the U.S. Bankruptcy Code, and (ii) over two-thirds of non-insider creditors voted to approve the Settlement Agreement. In addition, no objections to the Settlement Agreement were brought before the Bankruptcy Court.
The Bankruptcy Court then turned to the Gibbs rule. The Bankruptcy Court concluded that the fact that England applies the Gibbs rule is not a basis to decline to recognize and enforce the Settlement Agreement within the territorial jurisdiction of the United States. The Bankruptcy Court found that “a fundamental problem with the use of the Gibbs rule in international insolvency cases is that it mischaracterizes the discharge of debt as a contractual issue, rather than as a bankruptcy or insolvency law issue.” In reaching that conclusion, the Bankruptcy Court observed that bankruptcy proceedings, unlike other contractual disputes, inherently involve a societal choice to allow collective proceedings to discharge previously existing contractual obligations. Accordingly, the Bankruptcy Court held that, despite the Gibbs rule, if the approval of the Settlement Agreement by the Croatian court becomes final, for the reasons mentioned above, the Settlement Agreement should be recognized and enforced with respect to the nine foreign debtors within the territorial jurisdiction of the United States.
Chapter 15 of the Bankruptcy Code contemplates that once a foreign proceeding is recognized in the U.S., U.S. courts should be guided by principles of comity and cooperation with foreign courts in deciding whether to recognize and enforce the judgments of the foreign court. In this case, the Bankruptcy Court found that the Croatian court, having proper jurisdiction over the foreign debtors’ insolvency proceeding, should be able to oversee and approve the foreign debtors’ reorganization (and the resolution of all claims against the foreign debtors) under a national insolvency law and court procedures that satisfy widely recognized standards of fairness and due process.
The Bankruptcy Court observed that courts in England and Wales, and elsewhere, still grapple with application of the Gibbs rule more than 120 years after the decision was rendered, and noted the seeming incongruence with the broad consensus of international insolvency practitioners and jurists favoring the principle of modified universalism. In a 2012 decision that was surprising to the international community, the U.K. Supreme Court held that the principle of universalism in the insolvency/bankruptcy context did not permit the courts of the U.K. to recognize and enforce judgments entered in foreign insolvency or bankruptcy proceedings if such judgments would not be recognized under traditional principles of English common law. However, the United Nations Commission on International Trade Law (UNCITRAL) recently has adopted a new Model Law on the cross-border recognition of judgments that is designated to promote a universalist approach to bankruptcy and restructuring proceedings. The newer Model Law mandates the recognition and enforcement of insolvency-related judgments and thus, if adopted in the United Kingdom, would overrule Gibbs and, likely, Rubin.
It is worth noting that the Bankruptcy Court wrote its opinion despite the fact that no party in interest objected to the approval of the Settlement Agreement, and conclusively held that—in the exercise of comity—it was appropriate to recognize and enforce the Croatian court-approved Settlement Agreement—including provisions modifying English law debt—within the territorial jurisdiction of the United States. The Bankruptcy Court advised, however, that its decision does not mean that the Settlement Agreement will be recognized and enforced in other countries, and so the foreign debtors would be wise to either seek recognition and enforcement of the Settlement Agreement in the courts of England and Wales or to commence an insolvency proceeding or scheme of arrangement in England.
 Although the EA Law is available to all companies that are determined to be systemically important to the Republic of Croatia, the distress of the Agrokor group and the resulting threat of systemic impact upon the Croatian economy was the impetus for the creation of the new law.
 Within a prescribed twelve-month period (which can be extended by three months), the “extraordinary commissioner” (who is appointed to represent the debtors in the Croatian Proceeding) and the creditors’ committee must agree to the terms of a single settlement agreement. After a settlement agreement is agreed, it is published on the Croatian court’s website; three days after publication, all creditors are deemed to have notice of the agreement. Within 15 days after publication of the settlement agreement, creditors can vote upon the settlement agreement at a hearing. The settlement agreement is approved if either (1) more than half of all creditors by number (including non-voting creditors) vote in favor of the settlement agreement and more than half of all creditors in each class by value of claims vote in favor of the settlement agreement, or (2) two-thirds of all voting creditors by claim amount vote in favor of the settlement agreement.
 Agrokor and its subsidiaries that have at least 25% of their shares held by Agrokor are subject to the Croatian Proceeding. Although there are 77 Agrokor group entities that are parties in the Croatian Proceeding, only nine of those companies filed Chapter 15 petitions.
 The essence of the decision in Gibbs, based on an 1890 decision, is that a debt governed by English law cannot be discharged or compromised by a foreign insolvency proceeding (other than where the relevant creditor submits to the foreign insolvency proceeding). While the Croatian Proceeding has been recognized as a foreign main proceeding in the High Court of England and Wales under the U.K.’s own implementation of the then-current UNCITRAL Model Law on Cross-Border Insolvency (the “Model Law”), which Model Law was adopted in 1997, that court has not yet been asked to recognize and enforce the Settlement Agreement.
 Recognition and enforcement of the Settlement Agreement within the territorial jurisdiction of the U.S. with respect to the compromise of English law governed debt would be important, for example, if a creditor were to successfully obtain an English court judgment on account of such debt and look to domesticate such a judgment in the U.S. in an effort to enforce it against the foreign debtors’ U.S. assets.
 Rubin & Anor v. Eurofinance SA & Ors; New Case Reinsurance Corporation (In Liquidation) & Anor v. AE Grant & Ors (Conjoined Appeals) (2012) UKSC 46 (October 24, 2012) (“Rubin”).