I. Introduction

The insolvency or reorganization of a multinational enterprise facing financial difficulties can present extremely complex international legal problems. This monograph deals with transnational or cross-border insolvencies and the legal regime that governs the resolution of these controversies.

A. 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.

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. For example, Maxwell Communication Corp. v. Société Générale (In re Maxwell Communication Corp.)2 involved a media empire headquartered and managed in England with corporate entities and assets in the United Kingdom, the United States, and Canada, and thus involved numerous insolvency proceedings in both

1.See, e.g., Maxwell Communication Corp. v. Société Générale (In re Maxwell Communication Corp.), 93 F.3d 1036 (2d Cir. 1996) (involving two main proceedings, one in the United States and one in the United Kingdom). See also United States v. BCCI Holdings (Luxembourg) S.A., 48 F.3d 551 (D.D.C. 1995) (involving subsidiary banks operating in some 75 countries and proceedings in the United Kingdom and the United States); In re Olympia & York Dev. Ltd., [1993] 12 O.R.3d 500 (Ont. Gen. Div.) (proceedings in Canada and the United States); In re Maruko Inc., 160 B.R. 633 (Bankr. S.D. Cal. 1993) (proceedings in the United States, Japan, and Australia); In re Axona Int’l Credit & Commerce Ltd., 88 B.R. 597 (Bankr. S.D.N.Y. 1988) (proceedings in Hong Kong and the United States).

2.93 F.3d 1036 (2d Cir. 1996).

1

International Insolvency

the United Kingdom and the United States.3 United States v. BCCI Holdings (Luxembourg) S.A.4 involved the liquidation of a parent bank headquartered in Luxembourg with banking establishments in some seventy-five countries.5 In re Olympia & York Developments Ltd.6 involved real estate empires in both the United States and Canada. In re Maruko7 involved a Japanese corporation with businesses in Japan, Australia, and the United States, and insolvency proceedings in each of those countries. In each of these cases, and in many others, the existing insolvency regimes of the applicable countries were insufficient to deal with the transnational legal problems.

Cross-border insolvency problems are not limited to the failure of major international businesses. Even in small cases, assets may be located in various countries, for good or for bad reasons. A domestic business may have foreign branches or subsidiaries, or a foreign business may have domestic branches or subsidiaries. Property located in a foreign country may provide security for a debt so that domestic assets can be used to pay unsecured creditors. Foreign creditors may have valid claims in domestic bankruptcy cases, and domestic creditors may have valid claims in foreign bankruptcy cases. Any one of these situations raises a transnational insolvency problem.

The increase in transnational insolvencies arises from the growth in international trade. Traditionally, banking institutions financed international transactions through letters of credit and resolved any problems that arose when particular debtors were unable to settle their international accounts. The growth of multinational businesses in the twentieth century has largely bypassed the banking system and created the possibility of transnational insolvencies.

3. Maxwell presents perhaps the most innovative solution to these problems: The U.S. bankruptcy judge appointed an examiner to harmonize the British and U.S. proceedings to permit a reorganization under U.S. law that would maximize the return to creditors. Maxwell, 93 F.3d at 1042. The examiner ultimately succeeded in negotiating a joint plan of reorganization under U.S. law and a scheme of administration under English law that provided for the partial reorganization and partial liquidation of the Maxwell empire.

4. BCCI Holdings, 48 F.3d at 551.

5.Id.

6.In re Olympia & York Devs. Ltd., [1993] 12 O.R.3d 500 (Ont. Gen. Div.).

7.In re Maruko Inc., 160 B.R. 633 (Bankr. S.D. Cal. 1993).

2

I. Introduction

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 international investment and the extension of international credit. The availability and effectiveness of insolvency procedures is an important point in assessing nonmarket risk:8 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.9 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.

B. Universality vs. Territoriality

Multinational insolvency proceedings frequently result in competing interests among the jurisdictions involved. The two dominant models for addressing international insolvency problems are universality and territoriality. Under the universality approach, toward which U.S. 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. The court uses “local assets to satisfy local claimants in local proceedings with little regard for proceedings or parties elsewhere . . . .”10 Territoriality takes the pessimistic view that local

8.See Harold S. Burman, Private International Law, 32 Int’l Law. 591, 592 (1998).

9.See Manfred Balz, The European Union Convention on Insolvency Proceedings, 70 Am. Bankr. L.J. 485, 486 (1996) [hereinafter Balz].

10.Maxwell Communication Corp. v. Barclays Bank (In re Maxwell Communication Corp.), 170 B.R. 800, 816 (Bankr. S.D.N.Y. 1994), aff’d, 186 B.R. 807 (S.D.N.Y. 1995), aff’d,

93 F.3d 1036 (2d Cir. 1996). See generally Charles Booth, Recognition of Foreign Bankruptcies: An

3

International Insolvency

claimants ultimately will not receive their fair share of the assets in a foreign insolvency. Consequently, under this approach a local court must provide for these creditors as well as possible, given the assets within the court’s jurisdiction.

Under the universality approach, a single forum should apply “a single legal regime to all aspects of a debtor’s affairs on a worldwide basis.”11 Universality is based on the assumption that, without coordination of laws and courts of different jurisdictions in transnational cases, the optimal use and distribution of assets cannot be accomplished, and asset waste and turmoil are certain to result.12

In practice, no country applies either the universality or territoriality approach without modification.13 United States bankruptcy law follows a modified form of universality, which accepts as its central premise that assets should be collected and distributed on a worldwide basis.14 This view rests on the assumption that, in a system of international cooperation, any loss to local interests in one case will be roughly balanced by a gain in another case, while commerce in general will benefit greatly from the application of predictable rules.15 However, U.S. law reserves to local courts the discretion to evaluate the fairness of home country procedures and to protect the interests of local creditors in certain circumstances.16 The enactment of Bank-

Analysis and Critique of the Inconsistent Approaches of United States Courts, 66 Am. Bankr. L.J. 135, 137–38 (1992); Lawrence J. Westbrook, Choice of Avoidance Law in Global Insolvencies, 17 Brook. J. Int’l L. 499 (1991).

11. See Maxwell, 170 B.R. at 816; see also In re Hourani, 180 B.R. 58, 63 n.9 (Bankr. S.D.N.Y. 1995).

12. See Hourani, 180 B.R. at 63–64.

13. See André J. Berends, The UNCITRAL Model Law on Cross-Border Insolvency: A Comprehensive Overview, 6 Tul. J. Int’l & Comp. L. 309, 314 (1998) [hereinafter Berends].

14. See id.; Bank of New York v. Treco (In re Treco), 240 F.3d 148, 154 (2d Cir. 2001). But see Hong Kong & Shanghai Banking Corp. v. Simon (In re Simon), 153 F.3d 991, 998 (9th Cir. 1998) (taking the view that the U.S. Bankruptcy Code adopts neither a universalist nor a territorialist theory, but instead adopts a flexible approach dependent on the circumstances of each individual case), cert. denied, 525 U.S. 1141 (1999).

15. See Hourani, 180 B.R. at 64–67; Jay Westbrook, Theory and Pragmatism in Global Insolvencies: Choice of Law and Choice of Forum, 65 Am. Bankr. L.J. 457, 464–66 (1991).

16. See Hourani, 180 B.R. at 64–70; Simon, 153 F.3d at 998.

4

I. Introduction

ruptcy Code § 30417 was a substantial step in the direction of the universality approach.18

17. 11 U.S.C. § 304 (2000).

18. See Treco, 240 F.3d at 154.

5