Учебный год 2023 / phd

extent, such laws have tended to incorporate the standards contained in the treaties. Therefore, by concluding a BIT, a host country is also taken not only to have restricted its ability to change the policies and laws that are favourable to foreign investment, but it is also under an obligation to improve and maintain a conducive environment for foreign investment.108 However, apart from the responsibility of the host countries to improve the overall framework for investment, there is an apparent lack of clear and specific measures in most of the BITs on improving the overall policy framework for foreign investment.109

From a cross-border insolvency perspective, the implication is clear. A host country will be potentially expected to align its cross-border insolvency regime in a manner that is in harmony with the general premise of the BITs which require the host country to promote, protect and create a favourable, stable and predictable legal environment for foreign investment. The underlying assumption upon which the BITs rest is that ‘clear and enforceable rules that protect foreign investors reduce risks, and a reduction of risk promotes investment.’110 In this context, an effective cross-border insolvency law stands a better chance to protect the interests of an insolvent foreign investor as it may facilitate chances of maximising the values of its assets and rescue.

4.5.2.4 Transfer of Funds and Repatriation of Capital and Profits

The right of a foreign investor to repatriate capital and funds is one of the specific aspects enshrined in the BITs that haven been concluded between SSA countries and foreign countries especially the developed ones. The inclusion of such right in the treaties marks a radical departure, as historically, this has been one of the contentious and difficult areas to negotiate and agree upon.111 The way the relevant provision is formulated in most of the treaties presents a wide meaning of what could unrestrictedly be repatriated by a foreign investor from a host country whenever such a need arises. To a foreign investor, the freedom to

108KJ Vandevelde (n 12) 522-25

109UNCTAD, World Investment Report 2008 (n 42) 17

110Ibid 95

111MI Khalil, ‘Treatment of Foreign Investment in Bilateral Investment Treaties’ (1992) 7 ICSID Rev Foreign Inv LJ 339; and JW Salacuse and NP Sullivan (n 50 ) 85-86

128

repatriate income and capital is crucially important. It not only helps the investor to meet its foreign obligations but also enables operations of an integrated multinational enterprise group which is critical in minimising transactional costs through, for instance, international division of production.112

This provision may be employed by the foreign investor to transfer capital and funds abroad for different purposes. The transfer may be made for the purpose of insolvency involving the foreign investor as a subsidiary within a multinational enterprise group, another company affiliated to the multinational enterprise group or multinational enterprise group as a whole. It may therefore be useful in facilitating rescue and restructuring of a multinational enterprise in default without undue delay that could otherwise be occasioned by the host country procedures. It is to be noted however that this freedom, if exercised in relation to insolvency, has the potential of bypassing the host country’s authorities. This may result in inconveniences and embarrassments to local creditors and local tax authorities, because they may be taken by surprise as to what is happening to the investment entity involved.113

Lack of an efficient control mechanism and an effective cross-border insolvency system reflecting the way multinational enterprises operate and invest in a host country (and above all which is not fit for the purpose of securing efficient cooperation and co-ordination with other jurisdictions) may certainly contribute to subjecting local interests and claimants to losses and the hassle of struggling in vain for repayment as it may be long before they realise that the foreign investor was a subject of insolvency proceedings abroad.114 Some provisions in the BITs

112I Mevorach (n 69) 13

113Text to n 107 and 144 in chapter 7; JL Westbrook and others, A Global View of Business Insolvency Systems (World Bank, Washington 2010) 227, showing how inclusion of assets located abroad might be essential for success or failure of a contemplated rescue.

114IMF, Regional Economic Outlook: Sub-Saharan Africa 2009 (IMF, Washington 2009) 40 &

53noting that during the recent financial crisis SSA was at a risk of capital repatriation which could adversely affect its economy. It was shown that the predominance of foreign owned banks in SSA exposes the region to capital repatriation in that the parent banks abroad might be tempted to repatriate capital from SSA due to balance sheet losses in the home country. It was contended that such transfer could have a contagion effect in the region which could lead to failure to meet the demand for trade finance, thereby affecting commercial activities to a point of stoppage. The stoppage could mean insolvency and cross-border insolvency, especially if it involves enterprises

129

expressly provide for an unrestricted transfer of funds for settlement of foreign debts as well as capital and income deriving from the total or partial sale or liquidation of an investment without undue delay and in a freely convertible currency.115 No doubt the import of the provision is intended to include transfers necessitated by insolvency proceedings which may be used to allow a global or separate sale or a global restructuring.116

The BITs concluded between the US and Mozambique, and the US and Rwanda allow the host countries to prevent a transfer of capital or fund through equitable, non-discriminatory and good faith application of domestic insolvency law or the protection of the rights of creditors.117 The implication of such provision for the host countries’ insolvency law system is twofold. Firstly, such countries should have a predictable and transparent system of insolvency that does not discriminate against foreign interests in order to qualify for the exceptions stipulated in the provision. This perhaps will be by the standards of the US’s insolvency system which not only is acknowledged for influencing the prevailing international insolvency benchmarks but has also been tested in practice for quite a long time.118 The second implication is that the host developing country ought to have the resources and capabilities to oversee implementation of such system in a manner that is consistent to the existing best practices that are based on the law of developed countries.119 Short of that, such countries may not enjoy the benefits that the exception presents.

While freedom to repatriate capital and funds is seemingly beneficial to investors, as it may contribute to minimising risk and transaction costs, it may, as mentioned above, potentially disadvantage host developing countries in SSA and

with international business connections. Even though such situation could merit bailouts by state aid, SSA countries would not have such financial capacity.

115 For various treaties concluded visit < http://www.unctadxi.org/templates/docsearch.aspx?id=779 > accessed 22/02/2010. In particular see Italy-Tanzania BIT; Sweden – Tanzania BIT; Germany-Tanzania BIT; Finland-Tanzania BIT; DenmarkTanzania BIT; Germany-Kenya BIT; and Indonesia-Mozambique BIT.

116I Mevorach (n 69) 171

117n 77 above

118Text to n 80 in chapter 3

119Ibid

130

expose them to financial defaults, especially where the involvement of the socalled ‘hot money’ is at issue. Ginsburg writes that:

….[R]equirements that capital be freely repatriated…. [c]an disadvantage developing countries, who might legitimately wish to avoid the disruption of “hot money” that can leave quickly on herd behaviour, such as occurred during the Asian financial crisis of 19971998. While developing countries freely tie their own hands with these restrictions, leading to distributional advantage for the investors, it seems unclear as a theoretical matter why such restrictions on investment contracts ought to be adopted ex ante rather than left to the individual negotiations between host state and foreign investor.120

The consequences may lead to a financial crisis within a host country and potential for a chain of insolvencies among domestic enterprises. This situation, which reflects what is termed as macroeconomic disturbance, a common feature of a market economy, requires efficient crisis resolution tools that include a predictable and highly transparent insolvency system, a system that could deal with enterprises facing financial difficulties in a manner that takes account of the following aspects: the possibility of rescue; the international elements arising from the liberalisation and cross-border links involving SSA countries; and the widely held consensus in favour of assistance, co-operation and co-ordination of cross-border insolvencies as a means of preserving rather than destroying going concern value.121

4.5.2.5 Reciprocity Principle

One of the basic principles in the BITs concluded in the recent times is reciprocity in facilitation of cross-border investment between the contracting parties. In theoretical terms, this principle pulls the contracting parties ‘away from aggressive territorialism’.122 The essence of this principle is that the

120T Ginsburg (n 11) 107

121See n 28 above

122B Wessels, BA Markell, and JJ Kilborn (n 1) 71. See also JW Salacuse (n 56) 158 and 162

describing the bilateral investment treaty as constraining a host country’s sovereignty by limiting its ‘ability to take what it may judge in the future to be necessary legislative and administrative action to advance and protect national interests.’ And further that ‘since most investor-state arbitrations are judging the legality of governmental actions, they have significant public policy consequences relating to the ability of sovereign governments to regulate enterprises within their territories.’

131

nationals and companies of either party to a treaty may invest under the same conditions and be treated in the same way in the territory of the other. This principle offers a foundation for assistance, co-operation and co-ordination in resolving cross-border insolvency problems between the contracting parties in a reciprocal manner. This foundation is consistent with the widely held consensus in favour of assistance, co-operation and co-ordination of cross-border insolvencies as a means of preserving rather than destroying going concern value.123 Notably, the cross-border insolvency legislation practice has to some extent shown that reciprocity of one form or the other is one of measures used to achieve co-operation where no relevant international agreements are in force.124

Despite the element of the reciprocity in the BITs, the prevailing asymmetry is such that investments tend only to flow from the home country into the host countries in SSA.125 In return, SSA countries offer just the promise and commitment to live up to the requirements of the treaties. While SSA countries may practically not be expected to export capital to the developed contracting countries, it is implicit that the prevailing reciprocal bilateral co-operation presents a scope for co-operation in resolving cross-border insolvency problems that could arise between the contracting parties.

SSA countries may consider according an automatic recognition (based on the BITs) of foreign proceedings commenced in the home country of a foreign investor in a host SSA country. However, given the nature of the BITs, it can be argued that the local proceedings in a host country would be governed by the laws of the host jurisdiction subject to the requirement of observing the relevant standards and principles provided in the BITs. Accordingly, the question is whether the host countries in SSA would have effective cross-border insolvency frameworks to deal with complex problems in an efficient, transparent and

123See n 28 above

124PJ Omar, ‘The Landscape of International Insolvency Law’ (2002) 11 Int’l Insolv Rev 173; ML Nauta & F Bulletin, ‘Introduction to Spanish Cross-border Insolvency Law-An Adequate Connection with Existing International Insolvency Legislation’ (2009) 18 Int’l Insolv Rev 59, 62, 71&72

125M Hallward-Driemeier (n 54) 8

132

predictable manner in the same way as their investors would have experienced if were to invest and become insolvent in the host developed country. In searching for a permanent solution, probably, consideration may need not to be given to just one BIT due to the implications that are likely to arise from application of the most-favoured nation principle. Rather, a proper permanent solution needs to take account of the increasingly dense network of such reciprocal BITs that SSA countries have entered as they ‘[represent] an important milestone in the evolution of international economic law’ and thus cross-border insolvency system.126

4.5.2.6 Expropriation

Protection against expropriation of foreign investment from a home country in a host country is one significant assurance provided by the BITs that is consistent with the protection of property rights of the foreign investors. According to the treaties, expropriation will be lawful and effective only if it is undertaken for a public purpose, non-discriminatorily and upon payment of prompt, adequate and effective compensation. The trend is for such treaties to also cover measures that are deemed to be ‘tantamount’ or ‘equivalent’ to expropriation or actions that would significantly impair the value of the investment.127

Interpretation accorded thus far opens the expropriation provisions to indirect forms of expropriations, creeping, and regulatory takings by a host country’s actions. Such actions may include regulatory actions that affect the value of an investment or render it economically not viable and hence requiring compensation. It is not necessary that it should be an isolated event or that the host country should try to take ownership of the investment.128 It is noteworthy that this interpretation creates an indirect link with insolvency aspects. One concern is that multinational enterprises may use the interpretation to protect themselves against many risks they would otherwise have assumed in the course

126JW Salacuse (n 56) 163

127See Treaty between Germany and Kenya Concerning the Encouragement and Reciprocal Protection of Investment 1996, Art 4(2) < http://www.unctadxi.org/templates/docsearch.aspx?id=779 > accessed 22 February 2010

128M Hallward-Driemeier (n 54) 6

133

of normal commercial transactions.129 Critics have argued that the BITs give foreign investors property rights in regulations that seem to affect their going concerns.130Accordingly, a refusal or delay by a host country’s institutions to assist, cooperate and/or co-ordinate with other institutions abroad in cross-border insolvency proceedings potentially involving reorganisation of the investment of the multinational enterprise could arguably be brought within this interpretation. This is so, if the refusal or delay contributes to failure of the desired reorganisation. 131

It may equally be the case where insolvency proceedings are commenced against a foreign investor in a host country, by the host country’s institutions or nationals despite claims of solvency based on its affiliation to a multinational enterprise group.132 It may also be the case where the proceedings have been initiated as a result of measures against the foreign investor such as tax claims initiated by the host government.133 Indeed, these scenarios may arise due to a number of such problems as uncertain and unpredictable cross-border insolvency framework, corruptions, whims and sentiments against foreign investments and invocation of

129Ibid 7

130Ibid 6 and 7. The recent decade has witnessed increasing numbers of arbitration cases filed by investors against host developing countries based on expropriation through regulatory taking. By 2003, ICSID was reported to have over 40 cases pending.

131See n 28 above

132See for instance the famous Yukos Case as discussed in MM Winter, ‘Arbitration without Privity and Russian Oil: The Yukos Case Before the Houston Court’ (2006) 27 U Pa Int’l Econ L

133See n 132 above. The Yukos Case is an illustrative of the point discussed above. In this case, Yukos, the then second biggest Russian oil company was burdened by the back tax bill by the Russian government which led to insolvency proceedings being launched by Yukos’ principal shareholders and creditors (14 foreign banks that were owed US$ 482) after refusing assurances from the management that it could remain in business and pay the debts it owes. As a result of the back tax claims and the liquidation, the company’s assets were acquired by Rosneft, Rassia’s state oil company. This was through a series of auctions. This has led to arbitration proceedings instituted by the shareholders of Yukos for compensation claims against the Russian Federation for illegal expropriation of their investment in the company in the pretext of tax claims and wrongful application of insolvency proceedings. See Hulley Enterprises Limited v the Russian Federation (PCA Case No AA226), Yukos Universal Limited v the RussianFederation (PCA Case No AA227) and Veteran Petroleum Limited v the Russian Federation (PCA Case No AA228) as cited in A Marhold, ‘Is There Light at the End of the Gas Pipe? On the (Provisional?) Applicability of the Energy Charter Treaty to the 2009 Russia-Ukraine Gas Transit Dispute and the Relevance of the Yukos Interim Awards’ (Proceedings of the Greifswald International Summer Academy on Energy and the Environment, 2011) < http://ssrn.com/abstract=1804323 > accessed 7 August 2011

134

public policy which may render a host country wishing to transfer investment to a favoured local investor.

4.5.2.7 Dispute Settlement

In addition to the foregoing, BITs do also provide for dispute settlement mechanisms that essentially require submitting for arbitration in the event of a dispute between an investor and a host country. Most of the treaties provide for International Centre for Settlement of Investment Dispute (“ICSID”) arbitration but ad hoc arbitration under the Arbitration Rules of the UNCITRAL is also common. In recent years, there have been increasing numbers of disputes and a broadening of the character of claims instituted by foreign investors against developing countries on account of alleged breaches of the treaties. It is not surprising that now the mechanism is being employed to resolve disputes arising out of regulatory takings adversely affecting the investment.

While the above is now the trend, the mechanism does not cater for the handling of insolvency proceedings involving a foreign investor, though the investor can use such mechanisms to claim compensation against a host state for allegation of discriminatory treatments in insolvency proceedings or illegal expropriation in the pretence of application of insolvency proceedings.134 It means that the conclusion of such BITs does not relinquish the need for effective insolvency machinery, with which insolvency proceedings involving foreign investors may be undertaken. On the contrary, it makes it imperative for the potential host countries to have an effective cross-border insolvency system that reflects the standards and principles provided by the BITs. It will seem that the absence of such machinery potentially puts the SSA countries at a risk of finding themselves in arbitral disputes involving the application of insolvency law or failure to put in place an appropriate insolvency framework that does not contradict the treaties they have concluded.

134 See Yukos case as discussed in A Marhold (n 133) above; and MM Winter (n 132) above

135

It is in in view of the above that Chung notes that ‘developing countries without a stable legal order present the very risks that are of concern to foreign investors, causing them to be disproportionately exposed to BIT-based claims…This…creates a great potential for conflict, especially when the host country’s government is deficient in the necessary characteristics of a sound legal system-“transparency, efficacy, accessibility, and equality.”’135 Given the trends of the arbitral awards with regard to foreign investment issues, it may perhaps not be surprising in an appropriate case, for it to be held that no effective insolvency law and in particular cross-border insolvency law could reasonably be held to be said to exist in a particular host country.136

4.6Inter-Regional and Regional Economic Arrangements

The desire for rapid commercial expansion has created incentives for the formation of certain types of preferential alliances between countries from different regions. While each SSA country is on average a member of at least two SSA regional arrangements, SSA countries are also involved in several interregional co-operations with other countries and particularly advanced economies in which their main export commodities are predominantly agriculture and natural resource-based products.137 These alliances, of which SSA countries are member states, complement and reinforce, through the free trade mechanism and liberalisation, the BITs that individual SSA countries have concluded with other countries. Such arrangements potentially generate two effects at most. Firstly, trade creation as the participating countries remove tariffs and other barriers and trade diversion as protection against non-participating countries increases. This is particularly so where, among other things, the member states are already major trading partners. In theory, the resulting effects stand to activate cross-border commercial transactions undertaken by modern commercial enterprises and hence the challenges of potential cross-border insolvencies.

135O Chung (n 54) 956, citing CG Garcia, ‘All the Other Dirty Little Secrets: Investment Treaties, Latin America and the Necessary Evil of Investor-State Arbitration’ (2004) 16 Fla J Int’l L 301, 322, 323, and 327

136On this line of reasoning see, A Anghie (n 8) 226-235

137A Mattoo, D Roy, and A Subramanian, ‘The Africa Growth and Opportunity Act and Its Rules of Origin: Generosity Undermined?’ (2003) 26 World Econ 829; F Söderbaum and P Stalgren (eds), The European Union and the Global South (Lynne Rienner Publisher, Colorado 2010)

136