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Preface
Cross-border (international) insolvency law attempts to regulate the treatment of financial and economic distress of debtors who have presence in or connection to more than one country. In recent decades, particularly following the 2008 global financial crisis, the challenges of addressing cross-border insolvency effectively have been highlighted in domestic, regional, and international policy considerations and reform agendas. Considering the cross-border insolvency of both commercial entities and financial institutions, this book explores the key theoretical and practical developments in this field from a broad inter-disciplinar y perspective to provide insights about the future of cross-border insolvency and how the system can be improved going forward.
This book is the outcome of a few years of research on issues and challenges concerning the theory and practice of cross-border insolvency. It is also a result of my involvement in standard setting and policy work, through roles in the World Bank Group Insolvency and Creditor/Debtor Regimes Initiative, participation in the United Nations Commission on International Trade Law (UNCITRAL) Working Group V, and in the Financial Stability Board (FSB) Resolution Legal Expert Group, and through technical assistance and capacity building in several emerging and developing jurisdictions. While these experiences left me optimistic about the ability of legal systems to improve and to cooperate across-borders, they also opened my eyes to persisting problems.
In my earlier research on cross-border insolvency, especially empirical studies, I was able to highlight the success of existing cross-border insolvency instruments, including the way courts have interpreted and applied them—in general, with a universalist spirit. In that research, I focused much on the glass half-full. This book explores the other—bleaker—half as well, with the aim of continuing to strengthen the system. It seeks to address pressing questions regarding the sort of future we may envisage for cross-border insolvency: Is a pure universalist system the ultimate aim? What holds universalism back? Should we at some stage replace model laws with treaties as the governing instruments in this field? Can trust be required of participants in cross-border insolvency? Should we employ sanctions or other forms of incentives to promote compliance with cross-border insolvency instruments? Why has the cross-border insolvency of multinational financial institutions not yet been addressed in a comprehensive framework, notwithstanding lessons from the 2008 global financial crisis? What is the right instrument for these institutions?
The book addresses these and related questions, and, in the process, provides a normative framework that can guide reform. That framework is built primarily on the theory and practice of cross-border insolvency; yet it is also informed by, and makes connections with, public international law and the international law-making The Future of Cross-Border Insolvency: Overcoming Biases and Closing Gaps. Irit Mevorach.
process, as well as behavioural international law and economic insights. Thus, it ventures outside the insolvency and cross-border insolvency silo to look at issues more broadly. The approach is also holistic in its attempt to address the variety of business structures, including both single entities and groups, and it makes associations between cross-border insolvency regimes for commercial entities and for multinational financial institutions.
The book is divided into seven chapters. Chapter 1 depicts the current state of affairs of cross- border insolvency, specifically of what is called ‘modified universalism’. Modified universalism has translated the theoretical model of universalism— where one law governs, and one forum presides in cross- border insolvency cases— to concrete and more nuanced emerging norms that are fit for the real- world and real business structures. It is, however, still held back where it is regarded as a trend and an interim solution in the context of an aspiration for pure universalism. Consequently, one of the challenges confronting the universalist approach, in its various forms, is that even though it is generally beneficial, it is not universally adopted. Chapter 2 then explores, by drawing on behavioural international law and economics, what the reasons for deviating from modified universalism in practice may be. It argues that certain decision- making biases may play a role in cross-border insolvency and can explain both negative inclinations and instances of lack of cooperation, as well as the relative success of modified universalism. The chapter’s key argument is that instead of yielding to territorial inclinations, cross- border insolvency law has a debiasing role to play. It should attempt to align choices with optimal solutions, overcoming biases, and should also close gaps in the cross-border insolvency system in line with modified universalism. Following this rationale, Chapter 3 suggests that modified universalism’s emerging norms should transform into customary international law (CIL), and shows how CIL can be a debiasing tool that can also close gaps in the system. In this respect, the chapter highlights the prominent international role of private international law and, thus, the role of actors and participants in international insolvencies as creators and guardians of international law. Chapter 4 considers which type of written international instrument could best serve a system based on modified universalism. Drawing on international law and practice, and economic and behavioural perspectives, it questions the predisposition in favour of a treaty as the ultimate solution and argues that while a treaty has potential benefits, it also entails important drawbacks. This chapter also shows the importance of instrument design and how it may promote effective implementation. Chapter 5 provides the normative framework for promoting broad compliance of countries and implementing institutions with the cross- border insolvency system. It thus elucidates the role of incentives and of mutual trust, the type of harmonization that can support compliance, the role of forum shopping in view of gaps and deficiencies in domestic legal systems and institutional frameworks, and the benefits and drawbacks of attempting to delegate implementation roles to external bodies to bridge capacity gaps and to overcome biases. Against this normative backdrop, Chapter 6 assesses existing
instruments for cross- border insolvency as they apply to commercial entities or to financial institutions, and unearths issues regarding gaps and biases in those instruments. The focus is on the global instruments; however, for comparison, this chapter also refers to the regional EU cross- border insolvency regime, which has significantly influenced global developments. When this book went to print, UNCITRAL Working Group V was developing new instruments concerning the insolvency of multinational groups and the enforcement of insolvency- related judgments; thus, this chapter also provides tentative insights concerning these developments. Chapter 7 provides concluding remarks regarding the future of cross- border insolvency.
This book, and the research and thinking it required, could not have come about had I not had the benefit of discussions with colleagues, co-thinkers in the field of international insolvency, including in debates and conversations during sessions of the World Bank Global Task Force on Insolvency (Washington/New York, 2013–15) and of UNCITRAL (since 2005). Within the UK delegation to UNCITRAL I had stimulating conversations in recent years, particularly with Dean Beale, Mark Smith, and Riz Mokal. I benefitted too from discussions of issues concerning international solvency with colleagues at the World Bank, especially: Vijay Tata, Leif Clark, Adolfo Rouillon, Mahesh Uttamchandani, and Antonia Preciosa. Specifically, I owe gratitude to readers of parts and drafts of the book at different stages of its development for their invaluable comments: Ian Fletcher, Janis Sarra, Adrian Walters, Ignacio Tirado, Jenny Clift, Ted Janger, Steven Schwarcz (and research assistant Miata Eggerly), John Pottow, and Jay Westbrook. I also benefited immensely from discussions, and comments on drafts, from colleagues at the Nottingham International Law and Security Centre: Dino Kritsiotis, Daria Davitti, Marko Milanovic, and Sandesh Sivakumaran. Additional thanks go to Tomer Broude and Carmel Mevorach for feedback, and to the participants in the following events where aspects of the book, or the research leading to it, were presented: the Insolvency Law Association (ILA) conference in London in March 2017, especially the discussant, David Chivers QC; the panel on ‘Financial Institutions Failure’ at the International Insolvency Institute’s Annual Meeting (London, 2017), especially the panel chair, Don Bernstein; the Brooklyn Journal of Corporate, Financial & Commercial Law Symposium on ‘The Treatment of Financial Contracts in Bankruptcy and Bank Resolution’ (Brooklyn Law School, New York, 2015); the Brooklyn Journal of Corporate, Financial & Commercial Law Symposium on ‘Choice of Law in Cross-Border Insolvency Cases’ (Brooklyn Law School, New York, 2014); and the UNCITRAL Fourth Colloquium on International Insolvency Law (Vienna, 2013). I am also grateful for help with access to materials, especially to my colleagues Stephan Madaus, Rodrigo Rodriguez, Janis Sarra, Monica Marcucci, Andre Boraine, and Sanam Saidova. Finally, I thank Aysenaz Tahmaz, Bojan Bajalovic, and Roni Mevorach for research and other assistance, and the production team at Oxford University Press, especially Eve RyleHodges, Jamie Berezin, Vignesh Kannan, and Allan Hoyano for their invaluable support. Interactions and discussions with my students in the module ‘International
Preface
Aspects of Corporate Law and Insolvency’ have also influenced my thinking. Of course, any mistakes in this book are my own, and the views expressed are solely mine and do not represent the views of any of the abovementioned organizations.
Irit Mevorach School of Law
Faculty of Social Sciences
University of Nottingham
September 2017
Table of Cases
AUSTRALIA
Bank of Western Australia v Henderson (No 3) [2011] FMCA 840 Federal Magistrates court, 2 November 2011 102
The Commonwealth v Tasmania (1983) 46 ALR 625 ................................. 142
BAHAMAS
In the Matter of Caledonian Bank Limited (In Official Liquidation under Supervision of The Grand Court of The Cayman Islands) 2015/COM/com/00034 114
BERMUDA
Z-Obee Holdings, In Re, 17 February 2017 197
CANADA
Antwerp Bulkcarriers NV v Holt Cargo Systems Inc [2001] SCR 951 Can 70 Babcock & Wilcox Canada Ltd, In Re [2000] CanLII 22482 (ON SC), 18 CBR (4th) 157 34
Hooley Ltd v Titaghur plc, The Samnugger Jute Factory and The Victoria Jute Co Ltd [2016] CSOH 141 ................................. 43, 46
In the Matter of Lehman Brothers International (Europe) (in administration) [2011] EWHC 2022 (Ch) 122, 233–4
Indah Kiat International Finance Company BV, Re [2016] EWHC 246 197
Integrated Medical Solutions Limited and Ors, In Re [2012] BCC 215 33
International Bank of Azerbaijan OJSC, Re, Chancery Division, 06 June 2017 248
Jetivia v Bilta [2015] UKSC 23 35
Maxwell Communications Corp, In Re [1993] 1 WLR 1402 (Ch) 26
MF Global UK Limited, In Re [2015] EWHC 2319 (Ch) 35
Nortel Networks SA & Ors, Re [2009] EWHC (Ch) 206 ............................ 23, 218
Nortel Networks UK Ltd & others, Re [2015] EWHC 2506 (Ch) ........................ 17
Odwin v Forbes (1814) ........................................................ 32
Official Receiver v Norriss [2015] EWHC 2697 (Ch) .................................. 35
Perpetual Tr Co v BNY Corp Tr Servs Ltd [2009] EWCA (Civ) 1160 ..................... 244
Rubin and another v Eurofinance SA and others and New Cap Reinsurance Corporation (in Liquidation) and another v AE Grant and others [2012] UKSC 46 25, 43, 45, 69, 75, 112, 115, 123, 221
Bemarmara Consulting, In Re, a.s., Case No 13–13037 (KG) (Bankr D Del Dec 17, 2013) ..... 45
British American Insurance Company Ltd, In Re, 425 BR 884 (Bankr SD Fla 2009) ......... 217
Cenargo International Plc, In Re [2003] 294 BR 571 37
Creative Finance Ltd (In Liquidation), In Re, BL 8825 (Bankr SDNY Jan 13 2016) 25
Cunard, In Re, 773 F2d 452 (2d Cir 1985) 32
Daebo International Shipping Co, Ltd, In Re, 543 BR 47 (2015) 114
Daewoo Motor Am, Inc., In Re, 495 F 3d 1249, 1259 (11th Cir 2006) 100
Elpida Memory, Inc, In Re, No 12–10947 (D Del Nov 16 2012) 45, 123
Enron, In Re, No 01–16034 (Bankr SDNY Dec. 10, 2001) 26
Felixtowe Dock and Railway Co v U S Lines Inc [1989] QB 360 ......................... 33
Flynn v Wallace (In re Irish Bank Res Corp Ltd), 538 BR 692, 696 (D Del 2015) ............
French v Liebmann, 440 F 3d 145 (4th Cir 2006) ....................................
Global Crossing Ltd, In Re, No 02–40188 (REG) (Bankr SDNY 2003) .................... 26
Hamilton, In Re, 240 F 3d 148, 153 (2d Cir 2001) ...................................
Hanjin Shipping Co Ltd, In Re, 16–3652 (3d Cir September 22 2016) ................... 107
Hilton v Guyot 159 US 113, 164 (1895) 100
ICO Global Communications Servs Inc, In Re, No 99–2933 (Bankr D Del 1999) 26
Inverworld, In Re, 267 BR 732, 740 No 10 (Bankr WD Tex 2001) 26
Lehman Bros Special Fin Inc v BNY Corp Tr Servs Ltd, 422 BR 407 (Bankr SDNY 2010) 244
Lineas Areas de Nicaragua, In Re, 10 BR 790 (SD Fla 1981) 32
Loewen Group Intl Inc, In Re, No 99–1244 (Bankr D Del 1999) 26
Maxwell Communication Corp, In Re, 170 BR 800 (Bankr SDNY 1994) 115
Mecachrome International Inc, In Re, No 09–24076 (Bankr CD Cal 5 June 2009) .......... 229
Metcalfe & Mansfield Alt Inv, In Re, 421 B.R. 685 (Bankr SDNY 2010) 694 ............. 24, 222
Multicanal, In Re, SA, 314 BR 486 (Bankr SDNY 2004) ............................... 34
Nortel Corp, In Re, WL 6053845 (Bankr D Del 2013) ................................ 26
Nortel Networks Corporation, et al, In Re, No 09–10164 (Bankr D Del 14 Jan 2009) ........ 229
Nortel Networks, Inc, In Re, 532 BR 494 (Bankr D Del 2015) 111 ................. 43, 74, 113
Nortel Networks UK Limited, In Re, No 09–11972 (Bankr D Del 8 June 2009) 229
Northshore Mainland Services, Inc, In Re (2015) 537 BR 192 21
Qimonda, In Re (2013) 737 F3d 14 24, 45
Sanjel USA Inc et al, In Re [July 28 2016] No 16–50778-CAG 26
Schroeder v Bissell 5 F 2d 838, 842 (1925) 87
Sec Investor Prot Corp v BLMIS (In re BLMIS) 513 BR (SDNY 2014) 35
Singer Company NV, In Re, 262 BR 257 (Bankr SDNY 2001) 26
SIPC v Bernard L Madoff Inv Sec LLC, 480 BR 501 (Bankr SDNY 2012) 35
Smouha, In Re, 136 BR 921 (Bankr SDNY 1992) .................................... 26
SNC Summersun et cie, et al, In Re, No 06–10955 (SMB) (Bankr SDNY) ................. 228
Societe Generale plc v Maxwell Commc’n Corp plc 186 BR 807 (SDNY 1995) .............. 35
Spansion Japan Limited, In Re, No 09–11480 (Bankr D Del 2009) ...................... 229
SPhinX, Ltd, In Re, No 06–11760 (RDD), 351 BR 103 (Bankr SDNY 2006), aff’d 371 BR 10 (SDNY 2007) ............................. 217
Spizz v Goldfarb Seligman & Co (In re Ampal-Am Israel Corp) 562 BR 601 (Bankr SDNY 2017) 35
Vitro SAB de CV, In Re [2012] 701 F 3d 1031 28
Weisfelner v Blavatnik (In re Lyondell) 543 BR 127 (Bankr SDNY 2016) 35
Table of Statutes and Other Instruments
AUSTRALIA
Australian Corporations Act 2001
s 581
BAHAMAS
Bahamian Companies WindingUp Amendment Act 2011
ss 253–56
CANADA
Statute of Canada
ch 47
CHINA
China’s Enterprise Bankruptcy Law 2007
Art 5
GERMANY
German Insolvency Statute of 5 October 1994 (Federal Law Gazette I page 2866), as last amended by Art 19 of the Act of 20 December 2011 (Federal Law Gazette I page 2854)
The Basic Law of the Federal Republic of Germany
Art 25
INDIA
India Insolvency and Bankruptcy Code 2016 ..... 37
ss 234–35
ITALY
The Italian Constitution of 1947
Art 10
MAURITIUS
Insolvency Act 2009 s
NETHERLANDS
Amendment to the Bankruptcy Act (Draft bill), 5 September 2017
REPUBLIC OF KOREA
Republic of Korea Debtor Rehabilitation and Bankruptcy Act 2005 with effect from 1 April 2006
Ch 5
ROMANIA
Law 85/ 2014 on Insolvency Prevention Procedures and Insolvency
Turkish Act on Private International and Procedural Law (Act No 5718) .
USC S 1515 (Bankr NDNY June 18, 2008) .
36
121
45, 71, 158
UNITED KINGDOM
Cross-Border Insolvency Regulation 2006
Sch 1, Art 1(2)(h)
Sch 1, Art 1(2)(i)
English Bankruptcy Act 1914
248
248
s 122 34
Insolvency Act 1986
s 426 33–4, 44
UNITED STATES
Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
s 256 114
Bankruptcy Code 34
Art 1507 33, 114
Art 1509 114, 222
Ch 11
Ch 15
s 304
s 1501(c)(1) .
Dodd-Frank Act 2010
Financial Institutions
33
33, 45, 113–14, 248
33, 40, 100, 130
248
37
Bankruptcy Act 2017 27, 192
Model Bilateral Investment Treaty
Art II, (Apr 1994) 91
Order Granting Recognition of Canadian Proceedings under 11
228
Second Restatement of the Conflict of Laws (American Law Institute 1969)
s 2 101
Directives
EC LEGISLATION
Bank Recovery and Resolution Directive (BRRD): (Directive 2014/ 59 of the European Parliament and of the Council, of 15 May 2014 Establishing a Framework for the Recovery and Resolution of Credit Institutions and Investment Firms and Amending Council Directive 82/ 891/ EEC, and Directives 2001/ 24/ EC, 2002/ 47/ EC, 2004/ 25/ EC, 2005/ 56/ EC, 2007/ 36/ EC, 2011/ 35/ EU, 2012/ 30/ EU, 2013/ 36/ EU, and Regulations (EU) No 1093/ 2010 and (EU) No 648/ 2012, of the European Parliament and of the Council, 2014 OJ (L 173) 190) 39, 241
Art 66 47, 241
Art 87ff 241
Art 95 242, 253
EU Winding-up Directive: (Council Directive 2001/ 24/ EC of the European Parliament and Council on the Reorganization and Winding-up of Credit Institutions 2001 OJ (L 125) 15) . . . . . . . . . 39, 47, 115, 239, 241–2, 247
Art 3 241
Art 9 241
Art 19 242
European Commission, ‘Proposal for a Directive of the European Parliament and of the Council on preventive restructuring frameworks, second chance and measures to increase the efficiency of restructuring, insolvency
Table of Statutes and Other Instruments
and discharge procedures and amending Directive 2012/ 30/ EU’ COM(2016) . .
Recital 1 .
Recital 2 .
. 193, 195, 200
. 194
200
Second Council Directive 77/ 91/ EEC of 13 December 1976 154
Regulations
Brussels I Regulation (Regulation (EU) No 1215/2012 of the European Parliament and of the Council of 12 December 2012 on the jurisdiction and the recognition and enforcement of judgments in civil and commercial matters) .
. . 180, 223
EU Regulation on Insolvency Proceedings (2000) (EIR) (Council Regulation 1346/ 2000, of 29 May 2000 on Insolvency Proceedings, 2000 OJ (L 160) 1 (EC)) 38, 80, 105, 181, 215
Art 3 218
Arts 4–15 .
Art 16
Art 17
Art 18
Art 26
Art 31
237
216
219
219
216
219
Recital 11 38, 215
Recital 12 38, 215
Recital 22 117
Recast EU Regulation on Insolvency Proceedings (2015) (Recast EIR) (Regulation 2015/ 848, of the European Parliament and of the Council of 20 May 2015 on Insolvency Proceedings, 2015 OJ (L 141) 19, entry into force 26 June 2017) . . . . . 23, 38, 80, 105, 215
Ch V
Art 3 .
Art 6 . . . . .
39
217–18, 225, 235
225
Arts 8–18 237
Art 19 216
Art 21 219
Art 33 216
Art 36 218
Art 41
Art 42 .
Art 72(3) .
Art 81
Recital 3
219
232
38
Recital 4 217
Recital 22
Recital 23
Recital 53 235
Recital 65 117
UNITED NATIONS
Working papers and Reports
United Nations Commission on International Trade Law, A/ CN.9/ 903, 26 May 2017, Report of Working Group V (Insolvency Law) on the work of its fifty-first session (New York, 10–19 May 2017) <http:// www.uncitral. org/ uncitral/ en/ commission/ working_ groups/ 5Insolvency. html> (A/ CN.9/ 903 Annex).
Preamble
Art 2
Art 7
Art 12 225
Art 13 225
Art 13(e) 226
Art 13(f) 225
Art 13(g) 225
Art 13(h) .
Art X
225
United Nations Commission on International Trade Law, A/ CN.9/ WG.V/ WP.146, 2 March 2017, Facilitating the cross-border insolvency of multinational enterprise groups: draft legislative provisions (New York, 10–19 May 2017) <http:// www.uncitral. org/ uncitral/ en/ commission/ working_ groups/ 5Insolvency. html> 230–5, 248
Ch 2
Ch 4
Ch 5
Pt B .
Art 2
230–1
231
232
232, 235
231
Table of Statutes and Other Instruments
Art 2 ter
Art 2(a)
Art 11
Art 11(2)
Art 11(4)
Art 12
Art 13
Art 13(2) 235
Art 15 231
Art 15(e) 231
Art 15(5)
Art 17(2)
Art 17(f)
Art 19
Art 20
Art 22 .
Art 23
Table of International Instruments
TREATIES, CONVENTIONS & MODEL LAWS
Cape Town Convention on International Interests in Mobile Equipment (2001) . . . . . . . . . . . . 144, 156, 176, 179
Convention on the Settlement of Investment Disputes Between States and Nationals of Other States, 18 March 1965, 17 UST 1270, 575 UNTS 159
Art 25 105
Art 36 105
European Union Convention on Insolvency Proceedings .
Hague Convention on Choice of Court Agreements, 30 June 2005
. 131, 194, 217, 226
144, 155, 223
Hague Convention on the Recognition and Enforcement of Foreign Judgments in Civil and Commercial Matters, 1 February 1971 105, 144, 222–3
Art 2 223
Havana Convention on Private International Law, 1928 (‘Bustamante Code’) 131, 137
Istanbul Convention (European Convention on Certain International Aspects of Bankruptcy)
Montevideo Treaty 1889
Montevideo Treaty 1940
131, 137
130–1
130–1
Art 48 137
New York Convention (Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1985)) 144
Nordic Bankruptcy Convention (1933, amended in 1977 and 1982)
131–2, 137
North American Free Trade Agreement (NAFTA) 205
Statute of the International Court of Justice 1945
Art 38 82, 89
Art 38(1) 85
Art 38(1)(a) 138
Art 38(1)(b) 83
Treaty on the Functioning of the European Union (TFEU)
Art 49
Art 54
UNCITRAL Model Law on CrossBorder Insolvency (MLCBI)
Preamble 124, 215, 224–5
Preamble(c) 215
Art 1 216
Art 1(2) 248
Art 2 216
Art 2(a) 216
Art 2(b) 217
Art 2(c) 217
Art 2(d)
Art 2(f)
Art 3
Art 5
Art 6
Art 7
217
217
123, 218
Art 8 124, 160, 215
Art 9 216
Art 11 216
Art 12 216
Art 13 216
Art 14
Art 15
Art 16
Art 17
Art 17(3)
Art 19
Art 20
Art 21
Art 21(2) 219
Art 21(3)
Art 21(d) . . . . . . . . . . . .
Art 21(e) . . . . . . . . . . . .
Art 21(f) . .
Art 21(g) . .
Art 22 . . . . . .
218
. . . . . . . . 219
218
218
. . 219
Art 24 216
Art 25 216, 219, 221
Art 25(1) 124, 176, 219
Art 26 216, 219
Art 27 216, 220, 221
Art 28 218
Arts 29–32 220
UNESCO Convention for the Protection of the World Cultural and National Heritage
United Nations Charter
Ch VII .
142
148
United Nations Convention on Contracts for the International Sale of Goods 84
Art 7, para 1 160
Vienna Convention on Diplomatic Relations, 18 April 1961, 500 UNTS 95
Art 36 113
Vienna Convention on the Law of Treaties 1969
Art 26
Warsaw Convention 1929
BILATERAL INVESTMENT TREATIES
138
149
INTERNATIONAL STANDARDS
Financial Stability Board, ‘Key Attributes of Effective Resolution Regimes for Financial Institutions’ (2011), revised in Financial Stability Board, ‘Key Attributes of Effective Resolution Regimes for Financial Institutions’ (2014) (‘Key Attributes’) 41 UNCITRAL Legislative Guide on Insolvency Law 9, 40, 151, 213 World Bank Principles on CreditorDebtor Regimes . . . . . .40, 174, 201, 213, 214, 250, 255
Preamble .
s 2
240
. 25, 203, 242
s 3.2(ix) 243
s 3.2(x) 243
s 3.9 242
s 4 24
s 7 240
s 7.1
s 7.2 242
s 7.3 28, 241–2
s 7.4
s 7.5
s 7.6
s 7.7
s 8
s 9
China-Australian Treaty on the Mutual Promotion and Protection of the Investment Agreement 1988 130
241
241–2
241
241
240–1
240–1
s 11.8 241
s 12 241
Annex 2 191
List of Abbreviations
ALI American Law Institute
BRRD Bank Recovery and Resolution Directive
CIL customar y international law
CJEU Court of Justice of the European Union
CLOUT Case Law on UNCITRAL Texts
COMI centre of main interests
EIR (EU) Regulation on Insolvency Proceedings (2000)
UNCTAD United Nations Conference on Trade and Development
UNCTIRAL United Nations Commission on International Trade Law
UNIDROIT International Institute for the Unification of Private Law
WTO World Trade Organization
1
Modified Universalism to Date
1.1 Introduction
This chapter depicts the current position of cross-border insolvency and, specifically, of what is called ‘modified universalism’—the prevailing approach for addressing cross-border insolvency cases, which is emerging from the theory of ‘pure universalism’ to suit the real-world circumstances. The chapter considers in this regard the treatment of multinational commercial entities (or enterprise groups comprising several entities) as well as multinational financial institutions (MFIs) in cross-border insolvency.1 It also synthesizes the different aspects of modified universalism into a set of emerging norms for the governance of such cross-border insolvencies, concerning jurisdiction, choice of law, recognition, assistance, and cooperation, accompanied by global duties and safeguards. It shows how these norms can increase global welfare by preserving cross-border links for the benefit of the stakeholders as a whole, matching cross-border insolvency solutions with the economic reality of businesses and financial institutions. In the process this chapter also suggests that, contrary to prevailing views, modified universalism is not a compromise or a manifestation of concessions to countries’ territorial inclinations until the ideal of pure universalism can be implemented. Rather, the correct understanding of modified universalism is as an approach that, if followed uniformly, can produce optimal results in cross-border insolvencies.
1 Namely, entities (or enterprises) of whatever form engaged in economic activities that have presence in or connections to multiple jurisdictions, eg through the location of their head office, registered office, assets, creditors, activities, or affiliates, or because of cross-border relocation before insolvency proceedings commence. ‘Cross-border Insolvency’ (or international insolvency) means here any form of process or solution concerning such entities (also referred to as ‘debtors’), including liquidation or forms of reorganization or restructuring processes. ‘MFIs’ include both banks and other non-bank financial institutions with presence in or connections to more than one country as noted above. Banking may be the main activity of financial institutions, or their activities may extend beyond simple deposit-taking and lending, covering a full range of non-bank financial activities. ‘Cross-border insolvency’ in the financial institutions’ context also refers to any form of solution that may be employed to resolve the distress of the MFI, including liquidation, reorganization, or the use of various resolution measures. The problem of coordinating resolution action across borders raises similar issues with respect to both bank and non-bank financial institutions and many ‘systemically-risky international financial groups are, at their core, investment banks and broker-dealers’ (International Monetary Fund, ‘Resolution of Cross-Border Banks—A Proposed Framework for Enhanced Coordination’ (11 June 2010) <https://www.imf.org/external/np/pp/eng/2010/061110.pdf>).
This chapter also admits the vulnerability of modified universalism. Conceptually, modified universalism is still held back where it is regarded as a trend and an interim solution. The survey of practice across legal systems also shows mixed success, whereby modified universalism is prevalent, yet is not fully universal, complete, and consistently applied. Territorial inclinations certainly persist and have been particularly pronounced during the global financial crisis of 2008 (‘the global financial crisis’), where there have been notable instances of discrimination or noncooperation in cross-border insolvencies. So far, scholars are divided on how they view the reality of cross-border insolvency, where some focus on the ‘glass half-full’ and others on the ‘glass half-empty’. This chapter seeks to break with that division and portray a more objective picture. The aim, however, is not to undermine (modified) universalism,2 but rather to be realistic about its current status in order, in subsequent chapters, to contemplate ways to strengthen the system of cross-border insolvency going forward.
The chapter proceeds as follows. Section 1.2 reviews the debate between universalism and territorialism. It explains each approach and its underlying philosophy and highlights the supremacy of universalism as a theoretical model for international insolvencies. Modified universalism is a derivative of the model of pure universalism. Section 1.3 describes the evolution of modified universalism, understood so far as the best interim solution. It delineates the key emerging norms, which, it is submitted, can be followed in the real world of cross-border insolvency. These norms are based on the universalist philosophy, yet accommodate nuanced solutions that take account of different business and financial institution structures. Modified universalism also does not rely on full convergence, harmonization, and the establishment of an international court or conclusion of a treaty. Section 1.4 describes, however, the scepticism concerning the feasibility of forms of universalism. It also depicts the reception and application of modified universalism in practice, revealing mixed success, whereby modified universalism is dominant yet not universally and consistently applied. Section 1.5 provides summary conclusions.
1.2 Pure Universalism: The Theoretical Paradigm
Solutions for cross-border insolvency have been considered against the backdrop of the theoretical debate between two polarized schools of thought, universalism and territorialism, linked to the antithetical principles of unity and plurality.3 This section describes these principles and the position of each approach. It portrays the supremacy of universalism as a theoretical model for the resolution of multinational default, where it is based on the preservation and maximization of the debtor value for the benefit of the stakeholders as a whole.
2 cf LM LoPucki, ‘Cooperation in International Bankruptcy: A Post-Universalist Approach’ (1999) 84 Cornell L Rev 696, 762 (who suggested ‘to recognize that universalism is the problem, not the solution, and to put universalism behind us’).
3 IF Fletcher, Insolvency in Private International Law (OUP 2005) 11.
1.2.1 Universalism: a model based on the principles of unity and universality
Under the unity principle applied to cross-border insolvency, debtors should be subject to a single and unified insolvency process encompassing all assets and claims.4 The resultant principle of universality addresses the effect of opening the unified single process and suggests that such proceedings will have a worldwide effect over all property and interests of the debtor, wherever located.5 In accordance with these principles, universalism proposes that cross-border insolvencies should be unitary and universal.6
More specifically, universalists have sketched a model of pure universalism, contemplating how, ideally, the cross-border insolvency system would look if we were to fully adopt the unity and universality principles.7 That model envisages a system whereby a single court administers the multinational case and applies a single insolvency law.8 Thus, all aspects of the multinational debtor’s insolvency, including the treatment of creditors’ claims, the administration and distribution of assets, all substantive and procedural legal issues, and all decisions would be conducted in one single proceeding and would be effective in all countries where assets or other aspects of the debtor are located.9 The same model would apply in regard to cross-border insolvency of MFIs, whereby one single jurisdiction is in charge of the insolvency proceedings and is responsible for the resolution of all domestic and cross-border activities of the failing institution.10
Universalism foresees a global, multinational convention that will create such a system based on universality and unity in cross-border insolvency.11 The global regime which such a convention would introduce would be equivalent to federal systems’ statutory structures. In those structures, even where state laws govern various commercial aspects, the federal insolvency law allows for the insolvency process to cover all assets and govern the interests of all stakeholders throughout the national market.12 Similarly, on the global level, an international convention would create a global structure for worldwide insolvency proceedings under a single law with universal effect. Ideally, a single forum would be created under
4 ibid. 5 ibid 11–13.
6 ibid. See also R Bork, Principles of Cross-Border Insolvency Law (Intersentia 2017) 28–29.
7 JL Westbrook, ‘A Global Solution to Multinational Default’ (2000) 98 Mich L Rev 2276, 2293–94.
8 ibid 2292 (noting regarding the ‘two elements necessary to an international convention for international bankruptcy: a single law and a single forum’ that: ‘These two elements are distinct and need not necessarily be conjoined in an international bankruptcy system, although ideally they would be’).
9 B Wessels, International Insolvency Law Part I (Wolters Kluwer 2015) 9.
10 RM Lastra, ‘International Law Principles Applicable to Cross-Border Bank Insolvency’ in RM Lastra (ed), Cross-Border Bank Insolvency (OUP 2011) 166.
11 Westbrook, ‘A Global Solution to Multinational Default’ (n 7) 2287 (noting that the international convention may not create an entire international commercial system). See also K Anderson, ‘The Cross-border Insolvency Paradigm: A defence of the Modified Universal Approach Considering the Japanese Experience’ (2000) 21 U Pa J Intl Econ L 679, 682 (noting that: ‘universalism in its pure form was not feasible without an international convention . .’).
12 Westbrook, ‘A Global Solution to Multinational Default’ (n 7) 2284, 2287 (mentioning eg the USA, Canada, Mexico, and Germany).
this system through establishing a single international system of bankruptcy courts, thus attaining benefits such as those achieved under a single national bankruptcy law.13 The insolvency representative or the manager of a reorganization would report to this single court system.14 The single international forum would apply a single bankruptcy law, preferably a supranational law on all insolvency-related matters, including the order of priorities and rules for voidable transactions.15
1.2.2 Territorialism: the traditional approach based on plurality and territoriality
The principle of plurality, on the other hand, envisages multiple proceedings opened in different countries regarding the same debtor, namely a divided administration of the debtor’s insolvency.16 The corollary principle of territoriality confines the effects of insolvency proceedings to the jurisdiction where proceedings are opened; that is, there should be no extraterritorial (outbound) effect to proceedings opened within the country, and a country need not give (inbound) effect to proceedings opened elsewhere.17 Plurality and territoriality correspond with the traditional notions of state sovereignty and vested rights, namely the conviction that the laws of one sovereign state cannot, of themselves and as of right, produce effects within the territory of another sovereign and independent jurisdiction. Thus, in insolvency, the law of the sovereign is imposed on all within its territorial reach, and that law grants vested rights in assets situated therein at the time an insolvency proceeding is begun.18
In line with these principles, and in opposition to universalism, under territorialism legal action may be taken against the debtor and its assets independently in the different countries where the property is located at the time of the insolvency filing. Such property may be seized by the courts of the jurisdiction where it is found for the benefit of local creditors; thus, in negative terms, territorialism is also called the ‘grab rule’.19 Administration of aspects of the insolvency is confined to each territorial jurisdiction, and each jurisdiction may apply its own law with little or no regard for foreign proceedings regarding the same debtor. Foreign proceedings may not have any effect on portions of the debtor and its assets located in other jurisdictions.20
13 ibid 2292–94 (noting that the single system may include more than one court and may be comprised of courts in different regions and of courts devoted to cases centred in large economics. In the absence of unified international institutions, the application of such regime could be achieved by harmonizing the private international law rules pertaining to insolvency, but Westbrook considers such solution to be much less predictable).
14 ibid 2293. 15 ibid.
16 Fletcher, Insolvency in Private International Law (n 3) 11; Bork, Principles of Cross-Border Insolvency Law (n 6) 21–22.
17 Fletcher, Insolvency in Private International Law (n 3) 13.
18 LM LoPucki, ‘The Case for Cooperative Territoriality in International Bankruptcy’ (2000) 98 Mich L Rev 2216, 2218; F Tung, ‘Fear of Commitment in International Bankruptcy’ (2001) 33 Geo Wash Intl L Rev 555, 561; JJ Chung, ‘The New Chapter 15 of the Bankruptcy Code: A Step Toward Erosion of National Sovereignty’ (2007) 27 Nw J Intl L & Bus 89, 93. See also Fletcher, Insolvency in Private International Law (n 3) 13.
19 LA Bebchuk and AT Guzman, ‘An Economic Analysis of Transnational Bankruptcies’ (1999) 42 JL & Econ 775, 777.
20 LoPucki, ‘Cooperation in International Bankruptcy’ (n 2) 725–55.
Similarly, in the context of cross-border insolvency of MFIs, under a territorialist system, the MFI in distress would be de-globalized; that is, proceedings may be opened in multiple jurisdictions where the institution has realizable assets, and each jurisdiction may separately treat that portion of the institution as if it were a standalone branch or subsidiary.21
1.2.3 Supremacy of universalism as the theoretical model
The opposing principles of unity/universality and plurality/territoriality in crossborder insolvency have created a ‘historic struggle’ that ‘has been unusually intense’.22 In the process, territorialism evolved and challenged universalism, pointing to significant issues in the purist model.23 These problems include: the reliance of pure universalism on full convergence of laws or the creation of supranational law, which may not be achievable;24 its inadequacy for business structures such as some forms of enterprise groups that comprise separate and independently controlled entities;25 and its disregard of the possible disadvantaged position of creditors where the process takes place in a foreign country.26 Yet, territorialism, including its modern version, called ‘cooperative territoriality’,27 by adhering to a solution based
21 Lastra, ‘International Law Principles Applicable to Cross-Border Bank Insolvency’ (n 10) 170. See also International Monetary Fund, ‘Resolution of Cross-Border Banks—A Proposed Framework for Enhanced Coordination’ (11 June 2010) 15 <https://www.imf.org/external/np/pp/eng/2010/061110. pdf>.
22 Fletcher, Insolvency in Private International Law (n 3) 11. See eg LoPucki, ‘The Case for Cooperative Territoriality in International Bankruptcy’ (n 18) 2216; Tung, ‘Fear of Commitment in International Bankruptcy’ (n 18) 561; F Tung, ‘Is International Bankruptcy Possible?’ (2002) 23 Mich J Intl L 31; Chung, ‘The New Chapter 15 of the Bankruptcy Code’ (n 18) 89; AM Kipnis, ‘Beyond UNCITRAL: Alternatives to Universality in Translational Insolvency’ (2008) 36 Denv J Intl L & Pol’y 155; S Franken, ‘Cross-border Insolvency Law: A Comparative Institutional Analysis’ (2014) 34 OJLS 97. cf eg Westbrook, ‘A Global Solution to Multinational Default’ (n 7); Anderson, ‘The Cross-border Insolvency Paradigm’ (n 11) 679; AT Guzman, ‘International Bankruptcy: In Defence of Universalism’ (2000) 98 Mich L Rev 2177; Bork, Principles of Cross-Border Insolvency Law (n 6) 28.
23 Although, the critique often confuses pure universalism with modified universalism. For example, the claim of territorialists that universalism cannot produce a workable jurisdiction test (LoPucki, ‘Cooperation in International Bankruptcy’ (n 2) 713 ff) concerns modified universalism, as under pure universalism the establishment of an international court provides a solution.
24 LoPucki, ‘The Case for Cooperative Territoriality’ (n 18) 2217. See also Chapter 5, section 5.3.2.
25 It has been argued that territorialism fits better with the way enterprises normally operate, namely as distinct entities, incorporated in each country where the debtor is doing business (LoPucki, ‘Cooperation in International Bankruptcy’ (n 2) 750).
26 ibid 734 ff (expressing concern about expectations of creditors regarding where an insolvency case will be held and under which laws); Chung, ‘The New Chapter 15 of the Bankruptcy Code’ (n 18) 120 ff (noting the problem of employees treated differently in different countries); Tung, ‘Fear of Commitment in International Bankruptcy’ (n 18) 578 (noting that local creditors may be disadvantaged because they are not ‘on the ground’ when a process takes place in a different country).
27 Under cooperative territorialism, each country would administer the assets located within its own borders as separate estates and would determine whether to reorganize or liquidate the estate and how to conduct a distribution, according to local laws. Yet, countries may enter into treaties to allow for mutually beneficial cooperation (LoPucki, ‘Cooperation in International Bankruptcy’ (n 2) 742–43). Thus, cooperative territorialism is grounded in territoriality (Kipnis, ‘Beyond UNCITRAL: Alternatives to Universality’ (n 22) 159, explaining that: ‘Cooperative territoriality is very similar to classic territoriality in that it provides for separate proceedings to occur in each country in which the debtor has assets’;
on splitting the case between jurisdictions and disregarding foreign stakeholders, cannot provide a regime that promotes the goals of insolvency when insolvency happens across legal systems.28
1.2.3.1 Universalism promotes the goals of insolvency law
The universalist approach, on the other hand, offers a solution for global insolvencies in designing a model that, in theory, achieves the fundamental goals of insolvency laws. 29 Insolvency law aims to promote the procedural goal of efficiency to achieve the substantive goal of fairness.30 Thus, wealth should be maximized, and waste minimized. In insolvency, this may require that the race of creditors to collect their claims and grab assets be stopped and replaced by mandatory collective procedures and that the process be subject to possible alternative arrangements such as reorganization or restructuring mechanisms. 31 It also requires that insolvency law is predictable, thus allowing relevant stakeholders to calculate and adjust to the risk of granting credit and of transacting with businesses. 32 Insolvency law should also ensure that creditors are treated equitably through equal treatment of similarly situated creditors as well as through
Westbrook, ‘A Global Solution to Multinational Default’ (n 7) 2302, noting that ‘. . the inevitable consequence is that real cooperation in a territorial system is necessarily very limited . .’).
28 Fletcher, Insolvency in Private International Law (n 3) 14 (noting regarding cooperative territorialism that ‘the theory encounters the serious objection that it gives rise to the consequence that creditors’ expectations of recovery would be affected by the chance location of the debtor’s assets at the moment of bankruptcy, which may bear no relation to the pattern of pre-bankruptcy conduct of the debtor through which the debts and liabilities have arisen . .’); Westbrook, ‘A Global Solution to Multinational Default’ (n 7) 2308 (arguing that territorialism’s ‘fundamental flaw is that no national bankruptcy law is symmetrical with a global market . . . no system of managing a general default can be effective unless it is symmetrical with the market . . ’).
29 An alternative approach is ‘contractualism’ (R Rasmussen, ‘A New Approach to Transnational Insolvencies’ (1997) 19 Mich J Intl L 1) under which companies would select, at the time of their formation, the jurisdiction and applicable insolvency law. This approach has been criticized for failing to appreciate the multiparty nature of insolvency regimes and the divergent claimants (see eg Westbrook, ‘A Global Solution to Multinational Default’ (n 7) 2303 ff; E Warren and JL Westbrook, ‘Contracting Out of Bankruptcy: An Empirical Intervention’ (2005) 118 Harv L Rev 1197, 1201; Fletcher, Insolvency in Private International Law (n 3) 14–15). However, aspects of contractualism support universalism, including: ‘ad hoc contractualism’ where parties in the course of insolvency agree eg to defer to a single jurisdiction (I Mevorach, ‘Towards a Consensus on the Treatment of Multinational Enterprise Groups in Insolvency’ (2010) 18 Cardozo J Intl & Comp L 359, 385 ff), or ‘cross-border recognition clauses’ in financial contracts that enhance certainty about the cross-border application of stays of termination rights (see Chapter 6, section 6.3.2). Contractual solutions cannot offer a complete solution for global default, however, as it is not possible in this way to reach the level of completeness and global obligation required (see Chapter 4, section 4.4 and Chapter 6, section 6.3.3).
30 RJ Mokal, Corporate Insolvency Law: Theory and Application (OUP 2005) 24–25; DA Farber, ‘What (if Anything) Can Economics Say about Equity?’ (2003) 101 Mich L Rev 1791, 1821.
31 TH Jackson, The Logic and Limits of Bankruptcy Law (Harvard University Press 1986) chs 1–2; see also Fletcher, Insolvency in Private International Law (n 3) 9 (noting that ‘at least one fundamental principle appears to command universal acceptance . . . This may be termed “the principle of collectivity”, and amounts to a recognition that insolvency constitutes an example of the so-called “common pool problem” . . ’).
32 Guzman, ‘International Bankruptcy: In Defence of Universalism’ (n 22) 2181.
