is lack of cooperation and coordination among courts, trustees and creditors in the international community’.136
Another argument against this principle is that the phenomenon of a corporate group assumes that each subsidiary is treated separately. Hence, the theory does not take into account that the assets and debts of one entity are sometimes mixed with the assets and debts of another entity of the same group.137 Thus, the territoriality principle raises several issues. First, is the principle capable of making cross-border insolvency work as effectively as domestic insolvency? Second, can it be relied upon as a better approach to deal with cross-border insolvency than the universalism approach? Granted that the territoriality principle has some merit; it is, however, disadvantageous, especially with the globalisation of businesses and the integration between countries, which makes it unworkable in cross-border insolvency cases. As a result, the cooperative territoriality approach that emerged from the territoriality approach is examined in the next section in order to ascertain whether it ameliorates the limitations of the territoriality theory.
(D) The Principle of Cooperative Territoriality
The principle of cooperative territoriality is a modified version of the territoriality approach to international insolvency. Lopucki contends that the vision of cooperative territoriality offers the best solution to the problem of international insolvency.138 He proposed that each country should be responsible for administering and managing the assets within its national borders, but admits that in some matters, there is the possibility of cooperation with other countries through international convention.139 Clearly, if a debtor has assets in various
136Isham (n 135) 1183.
137Guzman (n 92) 2177.
138Lopucki (n 103) 2216.
139Mevorach (n 1) 73.
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countries, the outcomes will be several bankruptcy cases in these countries.140 As a result, the idea of the main proceedings and secondary proceedings will not be in favour of the debtor and therefore it may be prudent to cooperate and consolidate in some cases.
As a matter of fact, this principle shares similar advantages with the territoriality principle, but it adds one fundamental point, which is the possibility of cooperation between courts and representatives in each country through international treaty. This cooperation can include, for example, the sharing of a creditors’ list or selling the assets in the same process.141
Nevertheless, most of the drawbacks of the territoriality principle apply to the cooperative approach, and besides, the cooperation between countries that this approach advocates is rare.142
As a consequence, the principle of cooperative territoriality is similar to the territoriality approach, and it does not offer a better solution than territorialism. The idea of cooperation among courts in different countries is hard to achieve in reality because there are communication barriers and no clear rules to guide the process. There is yet another approach, the ‘contractualism’ approach, which has emerged as an alternative solution to the other theories already discussed. Therefore, the next section examines this approach to determine whether it provides an optimal solution for dealing with the insolvency of MCGs.
140Bufford (n 116)143.
141ibid.
142Westbook (n 2) 2309; Bufford (n 81) comments “He optimistically believes that negotiating treaties of this sort would not be difficult; however, I would be very surprised to see such a treaty anywhere in the world in my lifetime”.
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(E) The Principle of Contractualism
The norm of freedom of choice of law was the main factor behind the proposition of the principle of contractualism as a workable approach for handling cross-border insolvencies.143
Generally, parties have an option in conflict of laws to select the court and the applicable law in private contracts with a few limitations. Under Rasmussen’s proposed ‘bankruptcy menu’, the party autonomy principle should be adopted and extended at the cross-border insolvency level by giving the parties concerned the right to select a particular country’s courts and the applicable law that serves the best interests of the companies and the creditors.144 Thus, providing businesses with the authority to determine the workable way for managing their interests implies that there will be no interventions or imposition of any mandatory system.145
Moreover, creditors and investors have the right to insert the selected court and the applicable law in lending contracts to prevent debtors from changing the designated court unless they obtain approval from all creditors.146
To clarify the proposal of Rasmussen, assuming that England is the home country of a debtor, but most of its essential operations are carried out in Italy and Germany, the debtor will have the option to select the appropriate regimes and add this to the article of association of the firm. Besides, they will choose the appropriate law from one of the places where the operations are carried out. With this arrangement in place, any cross-border insolvency problem will be filed in either a German or an Italian court, and the law of one of those
143Alan Schwartz, ‘A Contract Theory Approach to Business Bankruptcy’ (1997, 1998) 107 Yale Law Journal
1807.
144Robert Rasmussen, ‘Debtor’s Choice: A Menu Approach to Corporate Bankruptcy’ (1992) 71 Texas Law Review 51; Lucian Bebchuk ‘A New Approach to Corporate Reorganizations’ (1998) 101 Harvard Law Review
145Rasmussen (n 79) 2, Robert Rasmussen, ‘Where are All the Transnational Bankruptcies? The Puzzling Case for Universalism’ (2007) 32 Brooklyn Journal of International Law 983.
146Barry Adler, ‘Financial and Political Theories of American Corporate Bankruptcy’ (1993) 45 Stanford Law
Review 311.
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countries will be applied. When the designated court administers the assets, the other court provides all necessary assistance unless the debtor’s option is ‘unreasonable and unjust’.147
The justification of contractualism is that it offers the debtors the option of selecting the most efficient insolvency law. This option will boost the value of the company when it operates, as well as in the case of liquidation, and distribution rules will be beneficial for the company’s creditors and investors.148 Additionally, proponents of the contractualism approach argue that
Rasmussen’s proposal would assist in mitigating the problem of abusive forum shopping.149
He emphasised the need to identify the court in the corporate charter of a company at the beginning of the company’s operation in order to settle any bankruptcy problem that could be encountered in the future.150 As a result of this, debtors and creditors would be aware in advance of the court that will resolve their cases and there will be no way to change it unless there is consent from all creditors.151 Another justification for the contractualism approach is that the freedom of choice of court and bankruptcy law may encourage some countries to develop their insolvency laws to suit many companies, so that the companies would select their legal systems in the event of bankruptcy. For example, debtors will have an incentive to select laws in a forum that reduce the cost of credit for them.152
Plausible as the contractualism approach appears, it presents certain difficulties which prevent it from being fully appreciated, especially in the case of MCGs. From a practical point of view, one obstacle is that reaching a written agreement between all parties may be difficult because the number of creditors for a single firm in some cases is numerous, and
147Rasmussen (n 116) 2.
148Lopucki (n 81) 701.
149Mevorach (n 1) 77.
150Rasmussen (n 116) 51.
151ibid.
152Rasmussen (n 1) 2252.
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some creditors have more privileges than others. Thus, it may be problematic to reach an agreement that would be acceptable to everyone. In addition, the cost of written contracts is very high because the process is carried out by professional lawyers, and the cost of negotiations is also high.153 Schwartz has demonstrated the potential problems in debtors’ circumstances, which may change from the time of establishing the company to the time when it files for bankruptcy. If the initial choice was efficient at the beginning, it may not be efficient and could be expensive after a while.154
Another possible obstacle is that some firms may choose a jurisdiction that is absolutely inconvenient and may constitute harm for involuntary creditors, such as tort creditors.155
However, this argument conflicts with the proposal of Rasmussen, who concedes the absence of protection for involuntary creditors in his approach. Thus, those involuntary creditors should receive such protection through mandatory rules.156 Furthermore, with contractualism, parties may select the forum and the applicable law with no real link to cross-border insolvency cases. Nevertheless, this argument may be significantly flawed in view of
Rasmussen’s suggestion, which requires this sort of connection. Moreover, as Blumberg pointed out, not all contractors can bargain freely, most notably small suppliers, employees and consumers, all of whom may not have equal bargaining power.157 Finally, empirical
153Schwartz (n 143) 1807; Barry Adler and Ian Ayres, ‘A Dilution Mechanism for Valuing Corporation in Bankruptcy’ (2001-2002) 111 Yale Law Journal 83.
154Schwartz (n 143) 1807.
155It is possible to make a distinction between 'voluntary creditors' and 'involuntary creditors'. Voluntary creditors are those who choose to deal with the company. Members of this group of creditors vary, and they include financial institutions which, in most cases, investigate the financial situation of the company prior to any transaction and hence require some security for the loan. Other voluntary creditors are trade creditors, such as suppliers of services and goods, who are less likely to do such investigation and who, therefore, will generally be unsecured. Involuntary creditors, on the other hand, include creditors such as people with personal injury claims against the company.
156Lopucki (n 81) 701.
157Blumberg (n 26) 137.
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