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Studies have been undertaken on whether the strength of the rights enshrined in a BIT would provide adverse incentives to potential investors and whether they have actual impact on enhancing capital inflows to a host country. Divergent opinions and conclusions have so far been given.71 However, the dominant view is seemingly that the potential impact is high where the BITs are complemented by liberalised foreign investment regime with reasonably strong domestic institutions. Despite the fierce debate among scholars on whether or not the BITs have the impact of attracting foreign investors and FDI into a host country,72 it seems that the dominant scholarship, including the first rigorous quantitative study undertaken in the recent past,73 suggests that a higher number of bilateral investment treaties raise the FDI that flows to a developing host country.
The connection between the BITs and cross-border insolvencies is also evident in the standards and principles contained in the treaties and in the entire commitment undertaken by the host countries to ensure favourable environment for foreign investments.74 As it will be shown in the subsequent discussion, these standards and principles, which include the fair and equitable principle, national treatment, most favoured national retreatment and right to repatriation of funds, envision those that characterise the cross-border insolvency landscape. They therefore stand a better chance, in the course of time, to potentially
71M Hallward-Driemeier (n 54) 18-23 (noting that although her findings suggest that BITs do not serve to attract additional FDI, it is possible that this is due to its being obscured by other changes that are occurring between the two signatories’); JW Salacuse and NP Sullivan (n 50) 111, concluding that ‘there is strong evidence to show that [bilateral investment treaties] both protect and promote FDI in developing countries…..although the effect…is…realised slowly.’); and KJ Vandevelde (n 12) 504 noting that BIT have had only a limited impact on economic liberalisation.
72KP Sauvant, and LE Sachs (eds), The Effect of Treaties on Foreign Direct Investment Treaties, Double Taxation Treaties, and Investment Flows (OUP, Oxford 2009)
73E Neumayer and L Spess, ‘Do Bilateral Investment Treaties Increase Foreign Direct Investment to Developing countries?’ (2005) 33 World Development 1567-1585. For the updated version of this paper see <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=616242> , or <http://eprints.lse.ac.uk/627/1/World_Dev_(BITs).pdf > accessed 22/3/2009
74See text to part 4.5.2.1 through 4.5.2.7 below where the standards and principles are discussed.
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influence not only policy considerations that would shape cross-border insolvency regulation in the host countries but also their entire legal systems.75
The most significant argument is that BITs embody catch-all clauses characterised by general principles of law. They are, arguably, intended to protect foreign investors in any circumstances at the expense of the host countries. It is therefore not surprising that BITs have traditionally not been according explicit and specific reference to insolvency or cross-border insolvency as it is also the case for many other relevant aspects to foreign investors and investments. However, this does not mean that BITs are not meant to cover matters related to regulation of insolvencies as they affect foreign investors.76 Perhaps the only exception, which is arguably consistent with the surge in the cases of insolvencies in recent years, is the new emergent US treaty practices which, albeit briefly and in general terms, provide explicitly for treatment of insolvency aspects as they relate to transfer of funds and profits and repatriation of capital of an investor from the host country.77
The failure to explicitly and comprehensively provide for insolvency involving a foreign investor in a detailed manner could be associated with the recognition of difficulties involved in negotiating such insolvency issues and diversities available across jurisdictions with regard to regulation of insolvency. The other plausible explanation is the consideration that the BITs embody catch-all clauses and general principles of law constituting sources of international insolvency
75JW Salacuse (n 56) 165
76JL Westbrook, ‘Universal Priorities’(n 21) 35; and JW Salacuse (n 56) 165
77An example of such emergent practice can be afforded by Treaty between the Government of the United States of America and the Government of the Republic of Rwanda Concerning the Encouragement and Reciprocal Protection of Investment 2008 accessed < http://www.bilaterals.org/IMG/pdf/US-Rwanda_BIT.pdf > , also at < http://www.unctadxi.org/templates/docsearch.aspx?id=779 > accessed 22/02/2010. The relevant provision reads as follow. Art 7 (1) (b) provides that ‘Each Party shall permit all transfers relating to a covered investment to be made freely and without delay into and out of its territory. Such transfers include ( a)……(b) …..proceeds from the sale of all or any part of the covered investment or from the partial or complete liquidation of the covered investment…’ Art (4) (a) further provides that ‘ ‘Notwithstanding paragraphs 1 through 3,a party may prevent a transfer through the equitable, non-discriminatory, and good faith application of its laws relating to: (a) bankruptcy, insolvency, or the protection of the rights of creditors…’
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regulatory frameworks for contracting parties.78 The new trend of revisiting and renegotiating the BITs in order to reflect new concerns seem to focus on transparency, environmental and social issues and the host country’s right to regulate. It is yet to be seen whether this trend of renegotiating the BIT among contracting states might result in particularity in the way cross-border insolvency is treated. 79
The examination of the standards and principles contained in the BITs’ clauses below demonstrates the extent to which SSA countries have bound themselves in obligations that potentially affect and shape their policy choices as to crossborder insolvency regulation.80
4.5.2.1Scope and Definition of ‘Investment’ and ‘Investor’
With a view to ensuring comprehensive protection and promoting investment, the BITs that SSA countries have concluded with developed countries have, albeit to a varying degree, adopted a wide and open ended meaning of a foreign investment. A typical scope of what amount to a foreign investment includes foreign direct investment, financial and other portfolio investments. Among the commonly mentioned examples of such investments include movable and immovable property, shares of companies, and ‘other kind of interests in
78JW Salacuse (n 56) 165, stating that the ‘notion that principles embodied in BITs could represent general principles of law and thus constitute a source of international law has not received extensive consideration by scholars. But as BITs proliferate, more and more countries incorporate BITs into their domestic legal systems. Thus, there is scope for arguing that BITs manifest certain concepts on the treatment of investors and investments [in all aspects including in insolvency] that represent general principles of law.’; JW Salacuse, ‘Direct Foreign Investment and the Law in Developing Countries’ (2000) 15 ICSID Rev –Foreign Inv LJ 382, 382-400; and FA Mann, ‘British Treaties for the Promotion and Protection of Investments’ (1981) 52 Brit YB Int’l L 241, 249
79UNCTAD, World Investment Report 2008 (n 42)15 and 34; and JL Westbrook, ‘A Global Solution to Multinational Enterprise Default’(n 21) 2296
80See JW Salacuse (n 56) 163 contending that ‘…..unlike the situation that prevailed thirty years ago, government officials, international executives, lawyers, and financiers increasingly must take investment treaties into account in planning, negotiating, undertaking, and managing international investment transactions.
….the process of treatification of international investment law has also resulted in the creation of [international] regime of international investment [which] …constrain and regularize the behaviour participants, affect which issues among protagonists move on and off the agendas, determine which activities are legitimatized or condemned, and influence whether, when, and how conflicts are resolved.’
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companies’ and ‘claims to money which have been used to create an economic value or claims to any performance having an economic value.’81 The BIT between Germany and Tanzania includes copyrights, industrial property rights, technical process, trade names and goodwill including ‘business concessions under public law, concessions to search for, extract or exploit natural resources’. It provides further that ‘any alteration of the form in which assets are invested shall not affect their classification as investment.’82
This kind of broad definition and coverage of investment is similarly found in other BITs to which SSA countries are party. The broad definition for a foreign investment has been justified by the nature and character of investment. It is argued that an investment has potentials of taking a wide variety of forms that constantly evolve in response to the creativity of investors and the rapidly changing world of international finance. They include tangible and intangible assets, property, and rights.83 Indeed, the scope of such definition seems to be broad enough to include, the interests of lenders, such as international financiers to multinational enterprises and other investors’ undertaking in a host country. The implication of this is that it not only broadens the scope within which crossborder insolvencies may occur, but also widens the obligations of the host country in insolvency proceedings that involve a foreign investment.84
Given that SSA countries are the hosts, hosting such investments exposes themselves to involvement in contentious incidences of cross-border insolvency in either of the following scenarios. Firstly, in the event of insolvency of a foreign investor covered by a BIT, there is potential for having a great deal of claims from foreign countries that would need to be dealt with along with local claimants. Consistent with this is the fact that the investment may be a subsidiary of a multinational enterprise in a home country with other subsidiaries in other
81For instance Bilateral Investment Treaties between SSA countries and Germany available at < http://www.unctadxi.org/templates/docsearch.aspx?id=779 > accessed 22 February 2010
82BIT between Germany and the United Republic of Tanzania, Art 8
83JW Salacuse and NP Sullivan (n 50 ) 80
84Ibid
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countries including in other SSA countries.85 Thus, issues regarding co-operation and co-ordination which could preserve rather than destroy going concern value abound.86 Secondly, the foreign investor may have claims in a domestic investment undergoing insolvency proceedings which raise questions of their treatments and ranking of their claims in such proceedings. This scenario raises questions of the fairness and effectiveness of the domestic insolvency law which ought to be dealt with in a manner that is consistent with the relevant BIT.
The broad definition of investment may play a role in exposing SSA to ‘hot money’ and a potential risk for financial crisis and hence insolvency. The risk for the crisis requires a country to have an effective insolvency laws system that is capable of acting as a crisis resolution tool whilst at the same time preventing closure of a business which would otherwise be rescued. It is to be noted that ‘hot money’ played a key role in the occurrence of the East Asia financial crisis of 1990s which led to international attention for reform of insolvency systems in this region.87
4.5.2.2Standards of Treatment of Foreign Investors and Foreign
Investments
The BITs that developing countries in SSA have concluded mostly with developed countries specify standards for treatments of foreign investors and foreign investment from a home country in a host country. These standards are fair and equitable treatment, national treatment, and most-favoured-nation (“MFN”) treatment to be discussed in this section. Some BITs combine such standards in one article as is the case for the treaties concluded between the Netherlands and some of SSA countries.
In addition to the requirement for ensuring fair and equitable treatment of the investment of investors of a contracting party, such article would normally further provide that ‘[e]ach contracting party shall accord to such investments
85I Mevorach (n 69)
86See n 28 above
87T Ginsburg (n 11) 107. See also text to n 120 below
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treatment which in any case shall not be less favourable than that which it accords to investments of its own investors or to investments of investors of any third state, whichever is more favourable to the investor concerned.’88 The requirement to accord such investments full physical security and protection is an additional aspect that characterises such provisions. Furthermore, other BITs would stipulate that parties must extend fair and equitable treatment ‘in accordance with the principle of international law.’89 The significance of these standards as well as the obligations they entail to the host country is that an investor is entitled to the best treatment accorded by a host country to its or other countries’ investors, and at a minimum, to be treated fairly and equitablyfree from unreasonable demands or actions of a host government.
Arguably, the extension of these standards to insolvency situations would require a host country to deal with an insolvency involving a foreign investor in a manner that is not inconsistent with the provisions of the relevant BIT between the home country of the investor and the host country.90 That is to say, the treatment of the foreign investor’s investment in the insolvency proceedings would be expected to be fair and equitable, and under no circumstances should the treatments be less favourable than those accorded to the host country’s or third country’s investor.91
The import of the national treatment standard is that foreign investors are entitled to enjoy the same rights and privileges as national local investors. This means that domestic business entities and foreign entities (as well as any form of foreign investment) from a home country in a host country should be treated in the same manner in insolvency proceedings.92
88Agreement on Encouragement of Investments Between the United Republic of Tanzania and the Kingdom of Netherland 2001, Art 3(1) & (2) < http://www.unctadxi.org/templates/docsearch.aspx?id=779 > accessed 22 February 2010. Similar provisions are found in the treaties concluded by SSA with other developed countries.
89See Agreement on the Reciprocal Protection and Promotion of Investments Between Uganda
and France 2002, Art 3 < http://www.unctadxi.org/templetes/docsearch/aspx?id=779 > accessed 22/02/2010.
90JL Westbrook, ‘Universal Priorities’(n 21) 35; and JW Salacuse (n 56) 165
91Ibid
92Ibid
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It is noteworthy that an insolvent domestic entity may have a far greater chance of maximisation of the values of its assets and an increased chance for rescue where most, if not all, of its interested parties are within the host jurisdiction. On the contrary, an insolvent foreign entity in a host jurisdiction may not be able to effectively maximise the value of its assets and increase the chance for rescue because of failure of co-ordination and co-operation with other jurisdictions where the entity may have assets and creditors as well. This situation may be construed as running counter to the requirement of according not only fair and equitable treatment but also national treatment.93
Implementation of the MFN treatment standard would mean that a host country may not, in a cross-border insolvency context, treat an investor or investment from a home country partner state any less favourably than it treats investors or investment from any third country. Consequently, this principle would allow the foreign investor to take advantage of best treatment provided to another investor from a third country under a different arrangement, such as a cross-border insolvency regime operative within a regional integration framework, to which the host country and the third country are members. However, the BITs concluded between the UK and Tanzania as well as the UK and Kenya exclude the possibility of an investor in a host country claiming advantage that an investor from a third country gets on basis of being a member of a regional arrangement.94 Unlike the UK-Kenya BIT, the UK-Tanzania BIT also allows Tanzania to temporarily implement special domestic policies designed to provide
93RE Borai, ‘Cross-Border Corporate Insolvency: A Modest Proposal for An Enhanced International
Approach’ (PhD Thesis, Queen Mary College, University of London 2006) 244 & 255
94Agreement between the Government of the UK and the Government of the United Republic of Tanzania for promotion and protection of Investments, Art 7 <
http://www.unctadxi.org/templetes/docsearch/aspx?id=779 > accessed 22 February 2010. The article provides that the MFN standard will not apply in relation to the benefit of any treatment, preference or privilege resulting from (a) any existing or future custom union or similar international agreement to which either of the contracting parties is or may become a party, or (b) any international agreement or arrangement relating wholly or mainly to taxation or any domestic legislation relating wholly mainly to taxation.’
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incentive for growth of local industries.95 Although these kinds of stipulations could be argued as providing room to shape SSA countries’ policies and law in a manner that would take into account the local needs and developments, the way they are formulated tends in practice to restrict the realisation of the objective of such policies. This is because the host country, in pursuing such policies, is still required to ensure that the application of such policies is temporary and does not affect the foreign investment and companies.96
The significance of the requirement of fair and equitable treatment in the regulation of foreign investment from a home country in a host country may also suggest that all parties, whether foreign or domestic, having interests with or in the foreign investor/investment should be treated fairly and equally in local insolvency proceedings.97 Given the scope of what constitutes an investment, these parties may include international lenders, creditors and a parent company to which the foreign investor or investment is affiliated. As far as foreign investors are concerned, this is critical in inducing greater confidence in creditors when extending credit or rescheduling their claims.
The ability of international financiers to commence or fairly and equitably be involved in insolvency proceedings against the foreign investor in a host country reduces the risk of lending, and thereby increases the availability of credit and making of investment more generally.98 This is crucially significant in that foreign investors from advanced countries tend to have connections with international financiers from which they obtain credit. The issues that arise in extending the standards to cross-border insolvency regulation show how the bilateral investment treaties challenge and indeed shape the position of SSA
95Ibid, Art 4(3) provides that ‘[t]emporary special incentives granted by one contracting party only to its nationals and companies in order to stimulate the creation of local industries are considered compatible with this Article [on national treatment and most-favoured- nation] provided they do not significantly affect the investment and activities of nationals and companies of the other contracting party in connection with an investment. Each contracting party shall use its best endeavour to eliminate such incentives.’ In fact, it is inconceivable that a developing country may have and implement domestic development policies that are not seen to be at odd with foreign investment.
96Ibid
97JL Westbrook, ‘Universal Priorities’ (n 21) 35
98IMF (n 3) 5
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countries’ cross-border insolvency law and practice. Thus, apart from the crossborder insolvency implications of the bilateral investment treaties for the host countries,99 it seems also true that the complementarities nature of the treaties pull the host countries in SSA towards shaping their insolvency systems in a manner that would foster the objectives of the treaties.100
The import of these standards therefore is to restrict a host country in SSA from engaging in a cross-border insolvency regulation and practices which are unfair and discriminatory to foreign investors and the interested parties thereto, and which also counteract the mission of promoting and protecting foreign investments in the host country. 101 In view of the BITs, cross-border insolvency regulation and practice of the host country should necessarily recognise the international nature of the investments from the home country and the possibility of such investments having global interests that need to be taken into account in dealing with it in insolvency proceedings.
Consistent with the scope of application of the fair and equitable treatment standard in insolvency proceedings, is its broad interpretation which renders its applicability not limited to conduct attributable to the host country aimed at undermining the foreign investor.102 Rather, it extends to placing emphasis on the significance of protecting the investor’s legitimate expectations with regard to maintenance of a stable and predictable legal and business framework.103
99RE Borai (n 93) 240-250
100V Mosoti, (n 10) 121
101JL Westbrook, ‘Universal Priorities’ (n 21) 35; and M Hallward-Driemeier (n 54) 7 stating that ‘the rights given to foreign investors [under the BITs] expose policy makers to potentially large scale liabilities and curtail the feasibility of different reform options.’
102See UNCTAD, World Investment Report 2008 (n 42) 166; and, JW Salacuse (n 41)193-194. In
Compañía de Aguas del Aconquija S.A. and Vivendi Universal v. Argentine Republic, the tribunal concluded that a unilateral lowering of tariffs by the regulator and a prohibition to pursue lawsuits and enforce judgements rendered against debtors constituted an illegitimate campaign against the foreign investor amounting to a violation of the fair and equitable treatment standard, ICSID Case No. ARB/97/3, Award of 20 August 2007 at para. 7.4.39
103UNCTAD, World Investment Report 2008 (n 32) 166 and P Muchlinsiki, ‘Caveat Investor? The Relevance of the Conduct of Investor under the Fair and Equitable Treatment Standard’ (2006) 55 ICLQ 527, 530-531 ; Parkerings-Compagniet AS v. Republic of Lithuania, ICSID Case No. ARB/05/8 (Lithuania/Norway BIT), Award of 11 September 2007; and PSEG Global et al. v. Republic of Turkey, ICSID Case No. ARB/02/5 (Turkey/United States BIT), Award of 19 January 2007 at para. 252-253
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Indeed, ‘the application of the standard is increasingly covering a wider range of governmental administrative actions and judicial or other national dispute settlement process.’104 Its interpretation weighs heavily against the host states’ inherent power to regulate economic conduct within its borders.105 Notably, as it is the case with fair and equitable treatment, predictability, certainty and transparency are among key principles of an effective insolvency law system.
4.5.2.3Encouraging and Creating a Favourable Environment for Foreign Investments
Another important feature of the BITs which SSA countries have concluded thus far, envisages a requirement on the part of SSA countries to ‘encourage and create favourable conditions for investors.’106 Indeed, this is the overriding policy governing the BITs which is clearly reflected in the titling and affirmations of these treaties, though it is not surprising to find an explicit provision in that respect. Equally important in this context, is the requirement to accord full protection and security to such investments. The import of such provision is meant to cover the welfare of investment, even beyond its establishment.107 The link between this requirement and the host countries’ legal environment is reflected in the special policies and laws enacted by most SSA countries to support the promotion and protection of foreign investment. To a significant
104P Muchlinsiki (n 103)528. See also UNCTAD, World Investment Report 2008 (n 42) 163. It is worthwhile to note that the standard of fair and equitable treatment, which is a prominent feature of the Washington Consensus policies, has been also clearly spelt out in Goal 8 of the Millennium and Development Goals 2000 and the international insolvency standard benchmarks. Over the years, the standard has attracted a very wide interpretation. In CMS Gas Transmission Co. v Argentina Republic, ICSID (World Bank) Case No.ARB/01/8 Award of Tribunal 274 (May 12, 2005) < www.worldbank.org/icsid/cases/cms_Award.pdf > cited in O Chung (n 54)960, the standard was interpreted as ‘requiring a stable legal and business environment.’ It was further held in relation to this standard that: ‘The foreign investor expects the host state to act in a consistent manner free from ambiguity and totally transparently in its relations with the foreign investor, so that it may know before hand any and all rules and regulations that will govern its investment, as well as the goals of the relevant policies or directives, to be able to plan its investment…’
105See n 104 above
106A typical example of this formulation is evident in the BITs between the UK and some of the SSA Countries available at < http://www.unctadxi.org/templates/docsearch.aspx?id=779 > accessed 22/02/2010. See also JW Salacuse (n 41)193-194
107JW Salacuse and NP Sullivan (n 50) 91; and UNCTAD, World Investment Report 2008(n 42)
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