community.114 This in turn suggests that it has not succeeded in providing an appropriate solution to the problem of MCG insolvency. Consequently, attention has shifted to modified universalism, and hence, the next section explains why modified universalism is a better approach for dealing with the issue of cross-border insolvency of corporate groups in the EIR.
(B) Modified Universalism Theory in Insolvency Proceedings
Modified universalism theory is an alternative and interim solution to the problems posed by the universalism approach. Westbrook proposed this theory, which reflects recent developments in the cross-border insolvency framework.115 Modified universalism shares the same premise as the universalism approach. However, it is ‘modified’ because it stipulates that, so far as possible, there should be a single insolvency proceeding in the jurisdiction where the debtor is based. Without piercing the corporate veil, modified universalism strives to administer the estate of insolvent companies in a single proceeding, rather than in a series of piecemeal and unconnected proceedings in different countries.116 Thus, modified universalism strives to find a balance between purely territorial bankruptcy systems and a wholly universal bankruptcy system. Another feature of modified universalism theory is that it reserves some discretionary power for local courts to protect certain local interests.117 This is necessary in order, first, to give local courts the right to assess the fairness of the home
114Jully Pae, ‘The EU Regulation on Insolvency Proceedings: The Need for a Modified Universal Approach’
(2003-2004) 27 Hastings International and Comparative Law Review 556.
115Westbrook (n 2) 2276; Kent Anderson, ‘The Cross-Border Insolvency Paradigm: A Defence of the Modified
Universal Approach Considering the Japanese Experience’ (2000) 21 University of Pennsylvania Journal of
International Law 679.
116John Townsend, ‘International Co-operation in CrossBorder Insolvency: HIN Insurance (2008) 71 Modern Law Review 801, 821.
117Ulrik Bang-Pedersen, ‘Asset Distribution in Transnational Insolvencies: Combining Predictability and
Protection of Local Interests’ (1999) 73 American Bankruptcy Law Journal 386.
53
country’s main proceedings, and second, protect the interests of local creditors as well as the interests of the state itself.118
Advocates of modified universalism claim that this approach constitutes a short term solution and is a further step towards achieving the objectives of universalism theory.119 The theory also gives local courts some power to protect the assets and the interests of local creditors and allows a small room for public policy exceptions.120 Nevertheless, modified universalism has been criticised for these same reasons, as the discretion given to the national courts can cause serious problems. First, each local court may commence its own proceedings, which might lead to a multiplicity of proceedings in each country rather than a single insolvency proceeding, a problem that advocates of universalism theory argued could cause litigation delays and expenses.121 Second, in their attempt to protect the interests of local creditors, local courts may abuse their discretionary power to refuse to recognise foreign judgements, and they might be unwilling to cooperate with main insolvency proceedings because the corporation has a negative impact on the interests of local creditors.122 Local courts will not usually cooperate with representatives of main insolvency proceedings unless the courts ensure that the distribution of assets will be in the interests of their local creditors.123
118ibid; John Pottow, ‘Greed and Pride in International Bankruptcy: The Problems of and Proposed Solutions to
Local Interests’ (2006) 104 Michigan Law Review 1899; Samuel Bufford, United States International Insolvency Law 2008-2009 (Oxford University Press 2009) 23.
119Westbook (n 2) 2302; Edward Janger, ‘Universal Proceduralism’ (2006-2007) 32 Brooklyn Journal of International Law 819.
120Mevorach (n 1) 69.
121ibid.
122Lopucki (n 81) 728.
123ibid 727; Cambridge Gas Transport Corporation v Official Committee of Unsecured Committee of Unsecured Creditors of Navigator Holding PLC [2006] UKPC 26, [2006] 3 WLR 689.
54
Despite the above limitations, a modified universalism approach appears to be adopted in the EIR as a solution to the problem of the cross-border insolvency of MCGs.124 This is because the modified universalism approach recognises states’ sovereignty and encourages states to cooperate with one another. Indeed, such cooperation between the courts of the Member States has important implications for addressing the insolvency of MCGs, especially because most relevant parties will benefit from this cooperation.
(C) The Principle of Territoriality
This section discusses the territoriality principle in cross-border insolvency and explains its significance and drawbacks. It also examines whether the territoriality approach provides the best solution for the cross-border insolvency cases of MCGs currently and in the foreseeable future. Territoriality is the most commonly used term in the field of cross-border insolvency, and it ‘refers to a system in which each country administers the assets within the country’s own territory and recognises other countries’ rights to do the same’.125 Therefore, the territoriality principle accepts that two or more proceedings can be initiated in different jurisdictions for the same debtor. Implicitly, initiating separate insolvency proceedings and the appointment of separate liquidators will result in substantial loss of value of the assets of the companies.126 The rationale behind the territoriality approach is the concept of sovereignty, which means that the judgment made in a country is recognised and enforced in
124Bob Wessels, ‘The Place of the Registered Office of a Company: A Cornerstone in the Application of the Insolvency Regulation’ (2006) 3 European Company Law 183.
125Lopucki (n 81) 742.
126Fletcher (n 79) 13.
55
that country.127 In other words, a sovereign state has the power to control and supervise the assets located within the country’s territory.128
Another underlying factor for territorialism, which derives from sovereignty, is the desire of a sovereign state to defend its local interests through the application of its own insolvency law, which often reflects the country’s policies, values and interests.129 The territoriality principle connotes that where, for example, a company is faced with financial difficulties and it has assets in Italy and Spain, the company can commence proceedings in both countries and the courts will appoint representatives in the respective countries. While the court in Italy is free to apply Italian law to distribute the assets, the Spanish court will apply Spanish laws.
There are several advantages to this approach. First, territorialism respects each country’s sovereignty, and it reduces the possibility of any intervention from a foreign court in domestic law and policies.130 Second, territorialism seeks to eradicate the difficulty regarding identifying the home country of multinational debtors. As mentioned previously, this problem is considered to be a prominent weakness of the universalism approach because there will be separate insolvency proceedings for each insolvency case.131 Third, Lopucki argued that multinational enterprises could be structured and operated through various subsidiaries in different countries, but each subsidiary is operated and organised separately, which makes this approach more suitable.132
127 Sandile Khumalo, ‘International Response to the UNCITRAL Model Law on Cross-Border Insolvency’ (2004) International Insolvency Institute 6.
128Bob Wessels, Bruce Markell and Jason Kilborn, International Cooperation in Bankruptcy and Insolvency Matters (Oxford University Press 2009) 5, 6.
129John Chung, ‘The New Chapter 15 of the Bankruptcy Code: A Step Towards Erosion of National Sovereignty’ (2006-2007) 27 North western Journal of International Law & Business 89; Franken (n 113) 233.
130Frederick Tung, ‘Is International Bankruptcy Possible?’ (2001) 23 Michigan Journal of International Law 31.
131Lopucki (n 81) 701.
132ibid.
56
Fourth, from the perspective of local creditors, the territorialism approach is more beneficial, as it saves them travel expenses and foreign litigation costs, since the insolvency proceedings are carried out in their home country, which can effectively serve the local creditors’ expectations.133 Fifth, although the territoriality approach gives rise to a multiplicity of proceedings in various states, the costs of such proceedings are limited because each state’s court deals only with local assets and applies domestic laws.134 Finally, territorialism provides protection to local interests through the application of domestic laws which reflect local policies with regard to security rights and the distribution of assets according to the priorities of creditors. By implication, territorialism leads to favouritism towards local creditors to the detriment of foreign creditors.
Notwithstanding these advantages, territorialism has been criticised by Westbrook for not being efficient in dealing with cross-border insolvency cases. For example, territorialism theory makes the reorganisation of a corporation virtually impossible, and in the event of the liquidation, the value of the assets of the company will be reduced because most of the assets will be sold separately.135 Additionally, it may lead to the unfair distribution of assets because it is based on the available amount of assets in each jurisdiction. Therefore, if the company has financial difficulties and the assets are distributed in different countries, the amount of assets could be more in one country and less in another. As a result, the chances are that some creditors would get more money than other creditors in a different country. Similarly, Sara notes that ‘territorialism theory has a problem concerning multiple proceedings because there
133Lucian Bebchuk and Andrew Guzman, ‘An Economic Analysis of Transnational Bankruptcies’ (1999) 42
Journal of Law and Economics 775.
134Alexander Kipnis, ‘Beyond UNCITRAL: Alternatives to Universality in Transnational Insolvency’ (2008) 36
Denver Journal of International Law and Policy 168.
135Westbrook (n 2) 2309; Sara Isham, ‘UNCITRAL’s Model Law Cross–Border Insolvency: A Workable Protection for Transnational Investment at Last’ (2001) 3 Brooklyn Journal of International Law 1181.
57