24 Sep 2018 5:25 PM GMT
“Exercising discretion and applying the law locally is hard enough (for a judge). Doing so in an international setting “ups and ante” especially when the notional claim amounts exceed $1million as they did in Lehman”[i] The above statement perhaps brings out the true state of challenges and complexities which cross border insolvency proceedings throw open at international arena....
“Exercising discretion and applying the law locally is hard enough (for a judge). Doing so in an international setting “ups and ante” especially when the notional claim amounts exceed $1million as they did in Lehman”[i]
The above statement perhaps brings out the true state of challenges and complexities which cross border insolvency proceedings throw open at international arena. The challenges still linger on despite the system having handled the cases of the complexities and dimension such as Nortel Network Corp, Lehman Brothers and Maxwell Communications Corporation plc. This paper tries to capture the journey of Cross Border Insolvency (CBI) from “Grab rule to international co-operativism” as the world economic order attempts to maximize value of the enterprise for the collective benefit of stake holders.
As the business leave national boundaries in its pursuit to capture world market it faces many challenges and has to keeps on evolving, adjusting to local cultural sensevities, economic conditions, local aspirations, polity and policy as also law. Law is struggling to keep pace with the rapid internationalization of business especially when it comes to insolvency of such businesses. CBI is a complex system and interplay of many legal systems and remains a challenge for risk assessment. This is especially so because much of the local legislations were drafted keeping in view the local needs and conditions. Business is ever evolving and so are the financial system, structure and transactions operating at international level. CBI needs “greater realization of risk involved in multiple litigations” and acceptance of “judicial and jurisdictional restraint” and “creditor autonomy” over local claims.
Territorialism: Territorialism as the term itself explains, is based on the principle of supremacy of local jurisdiction and recognizes multiple proceedings operating in different and diverse national systems and leads to a “divided administration of debtor’s insolvency[ii]”. This limits the effect of insolvency of an enterprise to the local limits of the country where insolvency proceedings are initiated. It does not recognize or give effect to the proceedings initiated in other countries. This principle is based upon state sovereignty and vested rights of local players. Under this system action may be initiated against a debtor and its assets independently in different countries where such assets might be located. Due to emphasis on localism, this system is also sometime called “Grab Rule[iii]” as different legal systems apply their own law in respect of a single debtor with no regard to proceedings in foreign states. Thus, it practically de-globalise the business and fails to work for collective benefit of stake holders and totally disregards the fact that even a domestic enterprise may have assets and financial transactions and creditors in many jurisdictions across many countries.
Universalism: While territorialism works on the principle of “One Debtor – Diverse systems-and proceedings”, the Universalims, on the other hand, proceed on the premise of “One Debtor- Unified system and proceeding”. The Unity Principle, on which it is based, suggests that insolvency of a debtor having business operations and interest across many countries should be subjected a single and unified insolvency process encompassing all assets and claims. Under this system a single court administers multinational cases and applies a single insolvency law to creditor claims, distribution of assets, procedural issues and would need a single universal court system. This system, to a greater extent, addresses need of an evolving globalised business entity. The system, however, heavily rely on international treaty for its success.
Aim of an effective insolvency regime is maximization of value of enterprise through a fair procedure with a view to minimize the cost, time, waste and complexities involved in multiplicity of litigations. It should cover and take care of interest of all stakeholders without any discrimination. But such system requires a limited surrender of sovereignty by states in cross border insolvency.
Global enterprise requires a global approach so that commercial value could be maximized and issues could be addressed as whole and group-wide solutions could be evolved. Further, timely and time bound resolution or revival process is sine qua non for any effective insolvency process, delay and multiplicity of litigation could effectively rule out maximization of value. Diverse control of entity and its liquidation under diverse legal process could also negate a maximized resolution and revival. Therefore, in the absence of a global approach, there is risk of fragmentation of the business, including premature liquidation of entities to satisfy creditors’ claims in jurisdictions where entities operate or have assets[iv].
International Developments and Efforts: Before we discuss the evolving concept of modified universalism, it would be ideal to discuss in short the developments and efforts being made at international level to address the challenges facing CBI.
Leading Cases: The cases show how a creative approach can help in resolving complex issues.
Other Important Cases:
Attempts at International Level to evolve a model Law to deal with cross border insolvency:
Modified Universalism: As discussed earlier, while the territorialism works on the principle of “One Debtor – Diverse systems-and proceedings”, the Universalims on “One Debtor- Unified system and Proceeding”, the Modified Universalism – works on the principle of cooperation and coordination between main and secondary proceedings while retaining superiority of main proceedings and try to work out solution in the collective interest of all stake holders. Thus, it is a journey from Unity to Universalism to Universal cooperation.
While based on the basic concept on Universalism, modified universalism, however, recognizes the main as well as non main proceedings, a range of relief that should be provided to foreign proceedings, assistance of foreign courts and representatives, and mechanism to enhance cooperation coordination between courts and insolvency representatives.
Events and authorities as mentioned above, show that the world of insolvency has moved from “one-size fits-all solution” to modified universalism. The term ‘modified universalism’ was introduced by Professor Westbrook[xviii] in his book ‘Choice of Avoidance Law in Global Insolvencies. It is said that universalism in its pure form provided a theoretical model which transform a collective local insolvency into global one. However, this needs to be adjusted to the requirement of real world. But, as said by Kipnis[xix], this transformation cannot match real-world circumstances without modifications. This is because even global businesses practically operate in different jurisdiction where laws, cultures, business practices, institutional framework etc are different.
As also mentioned earlier in this write up, modified universalism requires some loss of sovereignty and control to achieve universal goal. It requires states to accept the principle of COMI for certainty as regards jurisdiction of forum and choice of law. It requires centralization of process in the form of ‘single forum’ approach where one country where the entity has presence, will have international jurisdiction and preside over entire estate of debtor across multiple states. Modified universalism also require that the principles for recognition of foreign judgment/forum, assistance and cooperation and enforcement also need to be understood and practiced. It emphasize that there should be level playing field for all stake holders so that both national and international stakeholders have equal access and participation in the insolvency process of debtor.
Courts in UK and US have given due recognition to the above. In Re BCCI, the court held that local creditors should not be favored and assets should not be ring-fenced[xx]. Similar approach is adopted by Courts in US[xxi] where it was observed that … the broad scope of bankruptcy jurisdiction under United State law is intended to permit similarly situated creditors regardless of where they are located, to be equally treated in bankruptcy or reorganization cases.
Conclusion: Thus, CBI is still work in progress. However, principles and practices based on modified universalism could lead to a more effective and acceptable solution. It is suggested by scholars that modified universalism can crystallize into binding law in the form of customary international law. They are of the view that treaty could provide long term regime as it could take care of compliance issues. Further, domestic insolvency law, systems and practices would also need to be strengthened in tune with MLCBI, which would then take care of lots of issues which pose challenge for CBI.
To Conclude the following quote from World Bank Report succinctly captures the need for efficient and effect CBI system:
Efficient and predictable Insolvency and Debt Resolution frameworks are key drivers to improve financial inclusion and increase access to credit, which may lead to the reduction of the cost for obtaining credit. Increased access to finance enhances enterprise growth, which in turn leads to preserving employment, growth and the creation of new job opportunities.
[i] Hon’ble Judge James Peck who presided over Lehman bankruptcy
[ii] Flectcher, Insolvency in Private International Law
[iii] LA Bebchuk and AT Guzman, ‘An Economic Analysis of Transnational Bankruptcies.
[iv] Insolvency within Mulitinational Enterprisae Groups- Mevorach.
[v] In Re Maxwell Communication Corp. 170 BR, 800
[vi] 170 BR 800 (Bankr SDNY 1994)
[vii] In re Casse V Key Nat’l Bank Ass’n – 198 F. 3rd 327, 336 (2nd Circuit, 1999)
[viii]  FCA 738 (30 July 2013)
[ix]  FCA 680 (Australia)
[xi] Drafted in 2001 and revised I 2005.
[xii] UKSC 46
[xv] Bank for international Settlement, Basel Copmmittee on Banking Supervision Report and Recommendations of the Cross-Border Resolutioon Group (March 2010)
[xvi]  UKSC 46
[xvii]  UKPC 36
[xviii] Westbrook, ‘Choice of Avoidance Law in Global Insolvencies.
[xix] Kipnis, Beyond UNCITRAL: Alternatives to Universalims.
[xx] In Re BCCI  No 10 Ch 213
[xxi] Flexitowe Dock and Railway Co Vs U S Line Inc  QB360