Insolvency Laws in International Approach: Prospects, Issues and Implications on the National level

Insolvency Laws in International Approach: Prospects, Issues and Implications on the National level

 

With the evolution of such notions as property, obligation, credit, and commercial exchange, the elements are in place from which individuals may manipulate their affairs with a view to enhancing the sum total of their material wellbeing. Thus, the concept of insolvency evolved as a common experience among human societies. While the traditional concept of insolvency has very ancient roots, and continues to supply the basis of social and legal responses to this phenomenon, an alternative, and more sophisticated, concept has been developed in recent times as a reflection of the pervasive role of credit in the increasingly complex and interdependent conditions of social and commercial existence (Fletcher, 1999).

This amounts to recognition of the erosion of general confidence in the credit system that would result from a state of affairs where unpaid creditors were compelled to await their debtor’s descent into absolute insolvency before any collective satisfaction could be sought. From this development, the enlightened perception has gradually emerged in a number of countries that it may sometimes be possible by timely intervention in a debtor’s financially troubled affairs to bring about a restoration of equilibrium and prudent governance that may avert the ultimate fate of balance sheet insolvency altogether, or otherwise diminish the scale on which it takes place, thereby accomplishing worthwhile results.

However, due to the differences in the experiences of countries, the laws on insolvency regimes is also dependent on the cultural and evolution of the state. Thus, this difference has also led to the differences in the approaches utilized by the countries in governing their insolvency issues. Thus, this essay looks at the international approach to insolvency law with particular approach in the European Community. The basic tenet of this paper revolves around the argument that the in lieu with globalization, there is a need to look at the insolvency regime within countries in the context of the international world. An international insolvency approach shall provide the impetus for the resolution of several problems plaguing most countries particularly among Multinational Companies.

This paper is divided into three parts. The first part shall discuss the national approaches on insolvency laws. The problems and the limitations of this approach shall be evaluated. The second part presents the international approach to insolvency law, the principles, the assumptions, the strength and weaknesses of the approach and the benefits it can give to insolvency laws in the internationalization of insolvency. The third part assesses the international approach in terms of other theories and its applicability of the international perspective in insolvency laws in Europe.

 

Diversity of national insolvency laws

            Diversity in national insolvency laws stems from the historical experiences that shaped the attitudes and the legislation within a society’s context. For instance, the differences in the attitude of the debtors and creditors, as are the social and legal consequences for the debtors concerned. According to Fletcher (1999) since, by definition, insolvency impacts upon the entire patrimony of the debtor, the range of legal interests which are in some way affected is very extensive. This observation ensures that there is a profound and intimate correlation between insolvency–whether individual or corporate–and the very wellsprings of policy and social order from which national law ultimately draws its inspiration. For this reason, despite numerous general resemblances, national insolvency laws and procedures differ from one another almost infinitely in ways both great and small.

The variations range from such fundamental matters as the underlying philosophy of the law-including the key question of whether its sentiments are inclined towards the alleviation of the debtor’s predicament, or towards the amelioration of the creditors’ exposure to loss (Wood, 1997)–to the more specific questions of detail concerning the manner in which proceedings are conducted, and the contents of rules of substance or procedure which bear upon a particular set of facts (Fletcher, 1999).

National legal systems differ in the extent to which they embody universalist or territorialist principles in their treatment of multinational insolvencies (Unt, 1997). First, national legal systems differ in the circumstances under which they will assert jurisdiction over a debtor to commence an insolvency proceeding (Wood, 1995). Divergent national rules regarding choice of forum create the potential for two primary bankruptcy proceedings, instead of the single proceeding required by a universalist goal.

Introducing an insolvency framework will introduce regulation and discipline over the flows of international capital – through lending and borrowing (Pettifor, 2002). It will do so not just in bankrupt states; but in states where lax lending and excessive borrowing could lead to bankruptcy. In other words, the very existence of the framework could help regulate capital movements, and prevent future crises. In the absence of a just and orderly insolvency framework for managing the crisis, groups of international creditors have largely been able to cut their losses and run (Pettifor, 2002). 

International Aspects of National Insolvency Laws

Globalization has expanded the scope of business transaction within countries. It has also exposed the limitations of the national insolvency laws in the realm of the international nature of most businesses. For instance, the debtor may have had dealings with one or more parties from other countries, or may own or have interests in property not all of which is exclusively within the jurisdiction of a single state. Liabilities may be owed to parties whose forensic connections are predominantly with a different country to that with which the debtor is associated; or the relevant obligations may be governed by foreign law, may have been incurred outside the debtor’s home country, or may be due to be performed abroad. Presently, most of these initiatives have yet to attain their intended objectives, and the lack of an internationally-agreed framework for resolving cross-border problems remains a matter to be deplored (Sir Millet, 1997).

Despite the wide variation between legal systems in terms of policy and approach towards insolvency, extending across the gamut from pro-debtor to pro-creditor, (Jackson, 1986) at least one fundamental principle appears to command universal acceptance (although the exact circumstances and mode of its application can vary). 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’, which arises whenever conditions are such that more than one person has rights over the same, finite fund of resources (Jackson, 1986).

The International Perspective in Insolvency Laws

It is possible that a workable compromise can be devised through a pragmatic combination of elements from all four of the leading doctrines which have just been considered, namely Unity, Plurality, Universality and Territoriality (Makoto, 1999). It may be termed ‘the Internationalist Principle’, since it is predicated upon the truism that an international insolvency requires a collaborative response on the part of every State whose legal or material interests are somehow involved within the fabric of the case (Fletcher, 1999). First, the integrity of each system and its concerns must be properly respected, by recognizing that any process which takes place under the auspices of the legal system of one country can only produce effects within another country with the latter’s concurrence (Fletcher, 1999). The second component of the proposed internationalist principle involves a modification of the doctrine of Universality so that it complements, rather than negates, the concept of Territoriality (Fletcher, 1999). Thirdly, the renunciation of cherished fundamentals also applies towards  the Unity versus Plurality antithesis: neither of these should be allowed to occupy a dominant place in the approach to a cross-border case, but each should be regarded as a potential option to be employed, according to circumstances (Fletcher, 1999).

The Internationalist principle is therefore one which aspires to realize, as faithfully as is practicable in any given case of international insolvency, the ideals of collectivity, equality of treatment for all creditors, and the respect for previously acquired rights, which as we have seen provide a unifying theme within the diversity of domestic insolvency laws (Sir Millet, 1997).

In the domestic context, bankruptcy law bridges litigation and corporate practices, state legislation and federal regulation, private distribution and public policy (Unt, 1997). The internationalization of a bankruptcy multiplies this complexity. National insolvency laws differ, as do the goals of bankruptcy legislation. International legal issues of comity and extraterritorialism must also be considered. In spite of the difficulty of the task, the growing number of multinational insolvencies has increased the demand for a workable international insolvency system (Unt, 1997). Debate now revolves around the shape that such a system should take. The criteria that have been used to evaluate potential forms of such international insolvency cooperation have included pragmatism, efficiency, predictability, and comportment with bankruptcy policies (Gaa, 1993).

Unt (1997) argues that application of the international relations theories of Institutionalism and Liberalism helps both to explain the development of the current international insolvency regime and to evaluate which legal structures may be best suited for the evolution of further cooperation. These two strands of international relations theory are also employed to ground and develop existing international insolvency legal literature (Slaughter, 1995).

Much of the international insolvency literature takes as its starting point the goal of universalism: the resolution of all claims in a single bankruptcy proceeding, recognized by all jurisdictions, using a single set of legal principles (Unt, 1997).

Universalism and territorialism are the two policies traditionally said to animate various legal systems’ treatment of international insolvency (Dalhuisen, 1986). They represent the conceptual extremes of international insolvency management. Territorialism, the non-coordination of international insolvency proceedings, is the inverse of multinational cooperation (Dalhuisen, 1986). In a territorialist system, each nation responds quickly to the impending failure of a multinational enterprise by moving to grab the assets of the enterprise located within its jurisdiction (Trautman, 1993). Each nation then conducts its own, separate bankruptcy proceeding to divide the assets found within its jurisdiction among local creditors according to the priorities of local law (Trautman, 1993). In this system, domestic bankruptcies have no extraterritorial effect Dalhuisen, 1986).

As the theoretical counterpoint to territorialism, universalism entails the collectivization of multinational bankruptcy proceedings (Trautman, 1993). A universalist system of international insolvency would call for a single insolvency proceeding, generally in the forum of the debtor’s principal place of business, utilizing a single set of legal rules, which all other jurisdictions would recognize. Such a unitary proceeding would administer and distribute all worldwide assets for the benefit of worldwide creditors (Trautman, 1993).

In international insolvency process would have to begin by adopting the key legal principles underlying all insolvency procedures (Raffer, 2001). For his own version Raffer (2001) proposed an international insolvency framework with the following principles.

1.    The first principle is that any process should be based on the application of justice and reason. The process should not be viewed as an act of mercy.

2.    The second principle is that any process should protect the human rights, and the human dignity of the debtor, as well as the rights of creditors.

3.    The third principle is fundamental to the Rule of Law; namely that it is not possible to be judge in one’s own court. In other words, neither creditors nor the debtor can control the court of bankruptcy, or decide on their own claims or payments. The judge has to be independent of both debtor and creditors, and to resolve the crisis within a framework of justice that recognizes the human rights of the debtor.

4.    Fourthly, Raffer (2001) added a vital principle, namely that citizens affected by a debt crisis, have a legal right to have their voices heard in the resolution of that crisis. In other words freedom of information, transparency of process and accountability to the public must be central to an international insolvency framework.

The innovative approach that has gained the most attention recently is an international insolvency framework (UN, 2002). The attraction to creditors of participating in a negotiated Insolvency workout is that it holds out the possibility that the firm can recover and eventually make good on its claims, or at least on more of them than they would likely obtain if the firm were wound up. The attraction to the shareholders of the firm is equally that the firm might survive and that their shareholdings could recover some value. Management is typically replaced. When the troubled debtor is a government, the mechanisms and incentives for entering into such an approach are somewhat different. Governments cannot be wound up and no creditor, public or private, will mobilize an army to force a bankrupt government to give up its public assets to the creditors.

There is no supranational court to oversee a governmental bankruptcy procedure and no global police to enforce the court s decision. Creditors can take a government to court, but it is not clear how successful they will be. In other words, while the pressure may be great on a government to  negotiate with its creditors, the pressure is not as great as for a troubled private firm. True, the government will be denied additional credit from foreign private sources until the debt situation is resolved.

Therefore, an international insolvency procedure needs to be framed in a way that respects the legitimate interest of all partners, so that is not counterproductive and does not discourage capital flows or endanger countries access to capital markets. That means, that one should avoid elements that could be perceived as giving rise to moral hazard.

The global marketplace continues to develop. Radical advances in technology and transportation over the years have made the global marketplace, once the province of a select few multinational corporations, an international bazaar with both large and small market-players. Accordingly, geographic barriers that for hundreds of years separated national economies have increasingly yielded to the strong flow of international business. This trend has had tremendous consequences for the international development of insolvency law. If a global market-player finds itself insolvent, it is likely that such a development will have consequences far beyond the market-player’s home country (Silverman, 2003).

In most large bankruptcy proceedings there will be at least some relation to another country’s bankruptcy law (Silverman, 2003). The debtor may have assets, headquarters, employees or inventory in a foreign country. If the debtor in such a case chooses to apply for bankruptcy protection in only one jurisdiction, it is likely that the forum court would be able to address cross-border issues as they arise. However, if the debtor finds it necessary to file for bankruptcy protection in more than one jurisdiction, issues of territoriality and universality will come into play. An example of such an instance occurred in the bankruptcy case of Maxwell Communication Corporation PLC (“MCC”). In this case, MCC filed for bankruptcy protection in both the United States and the United Kingdom (Silverman, 2003).

The principles of territoriality and universality have long been the guideline to deal with such cross border insolvency cases. According to the principle of territoriality, if an individual country’s bankruptcy laws are implicated in a multi-national debtor’s case, that country is obliged to apply its own bankruptcy law with regard to the assets in that country (Silverman, 2003). Conversely, under the system of universality, the bankruptcy law of the debtor’s home country is applied to govern the debtor’s assets wherever they may be found. However, the borderline between these principles in the recent case law has been blurred since there are often both universal as well as territorial elements to a large multinational bankruptcy. If the debtor files in one jurisdiction, and yet has assets in another, then the law of this second jurisdiction will normally lend assistance to the pending proceeding in the debtor’s home country (element of universality). However, if there appears to be strong elements of injustice in the foreign proceeding, notions of territoriality will often take place to protect the interests of local creditors.

The issues that arise from cross-border bankruptcies are of especially complex character. This is commonly conditioned by the fact that the creditors or the property of the participants involved in the civil relations are situated in the territories of foreign countries (Berger, 1995). When insolvency proceedings are initiated against a company whose places of business or assets are based internationally, the following problems may arise: it may happen that the creditors, being legal entities of a foreign country, lose remedies for the enforcement of their property rights (such as the right to participate in the legal proceedings); that the debtor’s property situated in the territory of a foreign country has not been qualified as part of the debtor’s assets; that the powers of insolvency professionals appointed for the proceedings appear to be limited (Gitin and Silverman, 1992). Cross-border insolvency experts have acknowledged that there is an urgent need to find legal mechanisms for the resolution of the issues mentioned above and any other issues, regardless of any divergence between various legislative systems in terms of legal regulation of such matters.

Nature of International Insolvencies

In its simplest form, a transnational insolvency may involve an insolvency proceeding in one country, with creditors located in at least one additional country. In the most complex case, it may involve subsidiaries, assets, operations, and creditors in dozens of nations.[1] One of the most noteworthy features of international bankruptcy law is the lack of legal structures, either formal or informal, to deal with an insolvency that crosses national borders. In addition, problems unique to transnational insolvency cases require special consideration’s. A number of large international insolvencies in recent years have brought to the forefront the importance of developing a system for dealing with such insolvencies.

The impact of international insolvency law is not limited to the legal issues involved in the pathology of failed and failing businesses. International insolvency law is also a major front-end factor in inter-national investment and the extension of international credit. The availability and effectiveness of insolvency procedures is an important point in assessing no market risk (Burman, 1998): It is thus an important investment consideration for both private investors and public institutions such as the World Bank and the International Monetary Fund. The legal rules governing insolvency law and practice are rooted deeply in the legal traditions of individual countries (Balz, 1996). In part this arises because insolvency law preempts and supersedes many rules of both substantive and procedural law. Moreover, the importance of national economic interests varies from country to country, resulting in very different insolvency laws

The two dominant models for addressing international insolvency problems are universality and territoriality (Bufford, et. al., 2001). Under the universality approach, toward which courts are moving, an international insolvency case is treated, insofar as possible, as a single case and the creditors treated equally wherever they might be located. Under the territoriality approach, each country looks out for its own creditors before contributing assets to pay creditors in other countries. Under the territoriality approach, each nation conducts its own insolvency proceeding with respect to the assets located within its jurisdiction and disregards any parallel proceedings in a foreign nation.

Some significant terms in discussions of bankruptcy policy are frequently employed without careful definition–indeed there is significant slippage in their usage. The term insolvent, or insolvency, describes a state in which debtors are unable to pay their debts or discharge their liabilities. It is derived from insolvable, meaning incapable of being solved (Waller, 2001).”

The credit industry has argued that individuals have become less responsible for their debts. They argue that the reason is that the stigma of bankruptcy has declined (Waller, 2001). They claim this stigma served as an important social norm that inhibited individuals from availing themselves of the debt relief of bankruptcy. From the creditor’s perspective things have really gone to hell since the death penalty for bankruptcy was lifted–though one is curious as to how this served the creditors’ interest in repayment.

Empirically, many of the recent initiatives toward international insolvency cooperation have been taken by courts. Practitioners seem to take it as given that the international insolvency field is characterized by a lack of legislative action, offset by an increased proclivity of courts to co-ordinate with one other to reach commercially feasible solutions in multinational insolvencies.

Analysis and Conclusion

Amidst the more ambitious debate about treaty-based arrangements for international cooperation, it should be remembered that it lies within the capacity of every independent State to remodel its national law so as to create the necessary conditions under which prudent and measured collaboration can take place. Despite certain shortcomings, the great virtue of these provisions is that they are already in force and available to be used: it is of little consolation to parties involved in a current case to be told that their predicament might have been alleviated under the terms of an international convention which, for various reasons, has not yet entered into effect.

Vital though they are to the attainment of fair and just results in the benighted circumstances of a cross-border insolvency, national laws also have their inescapable limitations. Since the writ of an individual legal system cannot run beyond the boundaries of its territorial jurisdiction, save by the fiat and license of those other sovereign authorities within whose domain the completed effects of a transnational legal process are to take place, some form of international cooperation is ultimately indispensable. It is one of the purposes of private international law to attempt to produce orderly solutions out of the chaos caused by the diversity of domestic laws and policies that are potentially applicable to a particular situation, relationship or transaction. Left to their own devices, however, the individual national systems of private international law have the propensity to generate fresh levels of diversity and, potentially, harmful chaos. To avert these unwelcome consequences, successive international efforts have been embarked upon with a view to establishing some kind of framework of rules and procedures for resolving the problems which typically arise in this context. In Part II of this work, the fruits of a number of such multilateral ventures were examined, and their respective merits and deficiencies appraised.

On the whole, the lessons to be drawn from a review of the regional, and global, conventions and agreements are chastening. Even between States which ostensibly have much in common, as in the case of the Member States of the European Union, the fact that insolvency has such profound effects upon a range of nationally sensitive matters, including property, security interests, personal status, and the management of the commercial economy and the credit system, has so far proved to be an insurmountable barrier to the conclusion of a worthwhile and effective European Insolvency Convention.

Given the difficulties of attaining effective international agreement even at a regional level, it can readily be appreciated how much greater are the obstacles to the creation of a framework of rules for adoption on a global basis. Far more realistic, it is submitted, is the strategy underlying the recently concluded UNCITRAL Model Law on Cross-Border Insolvency. This initiative has drawn much inspiration from the active contributions of those with first-hand experience of the problems of cross-border insolvency, namely insolvency practitioners and judges from many different jurisdictions and legal traditions throughout the world. By concentrating on the creation of minimum conditions to facilitate the development of workable solutions under the circumstances of the instant case, rather than seeking to impose a comprehensive regime of rules of jurisdiction, choice of law, recognition and enforcement, viewing this as a first (but vital) step along a gradual course of development. By opting for the form of a model law, rather than a convention, the authors have accepted the risk that initially only a small number of States may wholeheartedly embrace this concept, and implement its provisions fully in their national legislation. What is important, however, is that an early example should be set by a critical mass of commercially important States, who thereby display moral leadership in setting global standards in the provision of cross-border access and assistance in matters of insolvency.

While the stimulus to this global initiative may well have been the widely publicized series of large-value, multi-jurisdictional insolvencies which have occurred during the past decade, the potential benefits of effective international arrangements for those concerned with smaller value cases should not be overlooked. These are, after an, by far the most common sort of case to be encountered in practice. And yet they are precisely the cases in which, under present conditions, the resources needed to overcome the difficulties in reclaiming or administering overseas assets are least likely to be available. In the larger cases, the substantial costs of the professional services required to cope with the factors of geographical distance and legal diversity may assume a less daunting character, when viewed in relation to the overall value of the assets whose destiny is at stake. The economies of scale tend to operate in a contrary manner when total asset values are small.

International insolvency law has arrived at the threshold of an exciting period of development. Recent experiences have demonstrated the limitations of the separate national approaches, based on outmoded perceptions of the appropriate relationship between internal and external interests, and between domestic and foreign legal processes. The imperative need to build bridges between the individual national systems, and to create adaptable structures that will enable communication and cooperation to take place in response to the particular elements present within each case, requires a new vision, and new modes of thought, from all participants. In giving the name ‘internationalism’ to the spirit which underlies the current trend of thought, this author detects important affinities with the historic roots of the English approach to international insolvency, as depicted throughout this essay.

Insolvency laws need to be restated in terms which give a clear indication of systemic commitment to the cause of collectivity, accompanied by a readiness to provide international cooperation and assistance in support of that principle. The courts should retain a controlling discretion over the form and mode of collaboration to be undertaken in a given case: over-prescriptive and over-detailed legislative directions should be avoided, in the interests of allowing solutions to be devised which are both workable and fair. Although (as should be apparent from many passages within this book), the author fervently disclaims any intention to hint at a doctrine of judicial infallibility, he is thoroughly convinced that enormously beneficial consequences have ensued in recent times from the prudent application of the principle of judicial activism. In affirming a non-dogmatic, constructive approach to the resolution of problems experienced in a case of crossborder insolvency, the substance and quality of the result should be the dominant concern, rather than the imposition of any preconceived notion about the form in which the solution should be embodied.

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[1] Maxwell Communication Corp. v. Socio Gorale (In re Maxwell Communi-cation Corp.), 93 F.3d 1036 (2d Cir. 1996) (involving two main proceedings, one in the United States and one in the United Kingdom).

 

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