Учебный год 2023 / Theory & Principle in Cross-Border Insolvency, Ian_ F_ Fletcher

whose forensic connections are predominantly with a different country to that with which the debtor is associated; or the relevant obligations may be governed by foreign law, may have been incurred outside the debtor’s home country, or may be due to be performed abroad. The diversified state of the debtor’s affairs and activities may be such that the conditions for opening insolvency proceedings are simultaneously met with regard to more than one country, giving rise to the possibility of multiple proceedings in different jurisdictions. In any of the foregoing ways, a cross-border case may come into being. Where this is so, the conceptual matrix of private international law can be applied so as to identify the issues which may have to be resolved. These are, first, in which jurisdictions may insolvency proceedings be opened? Secondly, what country’s rules of law should be applied with respect to those aspects of the case in which elements of diversity are present? And thirdly, what international effects will be accorded to proceedings conducted at a particular forum (including where necessary the granting of enforcement to any judgment or order affecting persons or property involved in the proceedings)?

1.05Because of the complex, and comprehensive, nature of insolvency the practical difficulties encountered in a cross-border case may be considerably greater than those found in the more usual context of international litigation between solvent parties. Although many of the issues of principle are essentially the same, the close identification between insolvency law and public policy can introduce additional considerations of a quite fundamental character into the approach that will be adopted by national courts when presiding over an international insolvency matter. Unfortunately, the collateral victims of the prevailing state of disharmony are the parties whose misfortune it is to be ensnared in an insolvency having transnational elements: creditors who are already fated to receive only a fractional return upon their unsatisfied claims may well experience a further diminution of the value eventually transmitted to them, due to the additional costs, and systemic inefficiencies, associated with the administration of such cases. On the other hand, some creditors may discover that they can exploit the existing legal fragmentation to personal advantage, and may achieve a better rate of recovery through individual acts of diligence than would have been forthcoming to them via the insolvency processes on which the majority must perforce rely. What must be remembered, however, is that such private opportunism takes place, inevitably, at the expense of the less advantageously positioned majority. No one should pretend that this provides a basis for anything resembling a system of justice.

The Quest for Order and Rationalization

The foregoing observations help to explain why the private international 1.06 law aspects of insolvency have long been regarded as an arcane and rarified area of specialization, and at the same time have been castigated

for their arbitrary and capricious impact upon private and commercial interests alike. Over the past three decades, the frequency and magnitude of the cases which have confronted courts and practitioners have exposed the limitations of the existing body of law, nationally and internationally.4 These cases have provided a vivid, if unhappy, demonstration of the longfamiliar paradox of the subject of private international law, namely that the rules which have been developed within each system of law for the purpose of accommodating the conflicting effects of different national laws have somehow contrived to perpetuate, albeit at a different level and in a different way, the very syndrome of diversity which originally inspired them. Just as national systems of law differ from one another in their provisions and effects, so too do the national systems of private international law. When one examines those portions of each country’s private international law which are concerned with insolvency, the divergent––and often irreconcilable––positions are even more deeply entrenched, and fervently defended, than in the case of other types of conflict of laws. The increased awareness in recent times of the negative consequences of such international fragmentation of policy and approach to cross-border insolvency issues has fuelled the quest for improved solutions. Various initiatives have been pursued, as will be discussed in the later chapters of this book. These include, in some cases, reform of national laws with a view to engendering a more ‘international’ approach on the part of courts and officials.5 At the same time a number of multilateral treaties or conventions have been concluded, and other forms of coordinated international action have been pursued, with the aim of producing a harmonized body of rules in place of the individualized responses developed by each national system.6 Although progress has been slow and uneven, some of these initiatives have entered into force while others have yet to attain their intended objectives. The lack of an internationally-agreed framework for resolving cross-border insolvency cases at a fully global level remains a matter to be deplored.7 One of the

4For accounts of some of the causes célèbres of international insolvency, see Becker (1976) 62 A.B.A.J. 1290; the same author, (1981) 29 A.J.C.L. 706; Riesenfeld (1976) 24 A.J.C.L. 288; Nadelmann (1977) 52 N.Y.U.L.Rev. 1; Fletcher (1993) 2 I.I.R. 7; Bradley (1994) 3 I.I.R. 89.

5See Ch. 4 below.

6See Chs. 5 to 9 inclusive below.

7See the sentiments expressed, extrajudicially, by Sir Peter Millett in (1997) 6 I.I.R. 99, esp. at 108–113.

principal aims of this book is to provide an account of the current state of these various developments, indicating both their virtues and also their shortcomings, in the hope that a clearer picture will thereby emerge of what is needed and what can realistically be achieved under prevailing conditions of governmental willingness to enter into international commitments in this field.

1.2 DOMINANT PRINCIPLES OF DOMESTIC AND

INTERNATIONAL INSOLVENCY LAW

1.07In a cross-border context, insolvency law draws upon a blend of principles, some of which are referable to the general approach to be followed in cases of insolvency, while others address the special questions that result from the international dimension within the instant case. As already stated, the traditional differences between the laws of independent, sovereign countries render it somewhat dangerous to speak in terms of concepts and principles as though they enjoyed some kind of standardized application throughout the world. However, some common features can be cautiously identified within the make-up of many of the individual systems that have been studied comparatively, and hence a limited degree of generalization may be justified in terms of the structures and processes encountered within domestic laws. Just as legal systems can be arranged into groupings which represent various traditions, or ‘families’, within the global community of nation states, so do they appear to form themselves into a number of ‘sub-sets’ in terms of their allegiance to certain principles which influence their approach to the international aspects of insolvency, although the membership of the groupings at this level is by no means co-extensive with the respective legal ‘families’ in the realm of domestic laws.8

General Principles in Domestic Law

1.08Despite the wide variation between legal systems in terms of policy and approach towards insolvency, extending across the gamut from prodebtor to pro-creditor,9 at least one fundamental principle appears to

8For comparative surveys, based on extensive but by no means comprehensive assessments of the world’s legal systems and traditions, see Nadelmann (1943–4) 5 Un. Tor. L.J. 324; J.H. Dalhuisen, Dalhuisen on International Insolvency and Bankruptcy (1980–1986, looseleaf), Part II; Fletcher in I. F. Fletcher (ed.), Cross-Border Insolvency: National and Comparative Studies (Reports delivered at the XIII International Congress of Comparative Law, Montreal, 1990)

(1992), Part II, p. 269 et seq.

9See above, n. 3 and text thereto.

command universal acceptance (although the exact circumstances and mode of its application can vary). This may be termed ‘the principle of collectivity’, and amounts to a recognition that insolvency constitutes an example of the so-called ‘common pool problem’, which arises whenever conditions are such that more than one person has rights over the same, finite fund of resources.10 By regarding all those with claims against the insolvent debtor as members of a collectivized entity, the law transforms what were originally multiple relationships between each creditor and the debtor into a unified whole for the purpose of administering and distributing such value as remains in the debtor’s estate. One notable consequence of this process of transformation is that the chronological order in which the pre-bankruptcy liabilities were originally incurred ceases to be of relevance. However, while the aspect of temporal priority is disregarded, most national insolvency laws have embraced a policy of according preferential treatment to certain species of liability, so that debts falling within those categories are entitled to be paid ahead of those belonging to the category of ordinary debts. Conversely, other types of claim may be relegated to the rank of postponed debts which are not eligible to participate in the distribution of the debtor’s estate until all preferential and ordinary debts have been paid in full. An important aspect of the concept of collectivity is the pari passu principle of distribution, whereby all debts of equivalent rank are subject to an arithmetical process of abatement, based upon the relative proportions of the collective mass of claims belonging to that ranking class, and the total size of the fund available to pay those claims: the dividend payable to the holder of each separate claim is then calculated on a pro rata basis, applying this proportional formula, so that the scale of abatement is identical in every case.11 The essential notion of equality of treatment of creditors is sometimes expressed by means of the Latin maxim: par est condicio omnium creditorum (the condition of all creditors is equal).

In terms of the insolvency procedures provided under individual national 1.09 laws, which vary from one another in countless ways, the principle

of collectivity is a common denominator which is capable (within limits) of transcending the conceptual and structural distinctions between systems that are an inescapable reality at present, and for the foreseeable future. All systems generally provide at least one main procedure

10See the classic exposition of the common pool problem as it relates to bankruptcy law in T.H. Jackson, The Logic and Limits of Bankruptcy Law (1986), esp. chs. 1 and 2.

11For example, if the total funds available amount to £1,000, and the aggregate of claims ranking for dividend is £100,000, the arithmetical proportion is 1:100 (also expressible as 1%). Hence a creditor whose claim is valued at £100 will receive £1; one whose claim is for £1,000 will receive £10; and one whose claim is for £10,000 will receive £100.

whereby an insolvent debtor’s entire patrimony (apart from some permitted exemptions in the case of individuals) can be subjected to a process of liquidation and schematic distribution in accordance with the principle of collectivity. A further type of procedure which is widely encountered is one which offers an alternative to outright liquidation by means of a binding composition or arrangement concluded between the debtor and the general body of creditors. The principle of collectivity is also a standard feature of composition procedures in that, while it is often permissible for an agreement to acquire binding force through being accepted by a prescribed majority of creditors, and so become binding upon the dissenting minority, the latter are entitled to full parity of treatment under the terms of the scheme of distribution that can be imposed upon them.12

1.10One further issue which is of fundamental importance is the extent to which rights arising under general law, and which were duly acquired and perfected prior to the commencement of insolvency, are recognized as surviving the onset of formal insolvency proceedings. The principle of respect for such pre-bankruptcy rights is widely accepted by national laws, even if the nature of such rights and the conditions attaching to their creation are by no means uniform throughout the world. Broadly speaking, however, the precedence enjoyed by proprietary over personal and contractual claims under general law is replicated under the regime of insolvency law, with the consequence that security interests and other rights in rem which have been created prior to the commencement of insolvency remain intact, and are thus permitted to accomplish their intended purpose of insulating the creditor from full exposure to risk of loss in the event of the debtor’s default. Hence the fully-secured creditor is enabled to stand outside the collective process of administration of the debtor’s unencumbered assets, while the partially-secured creditor is placed in the position of having to rely on that process only in respect of the unsecured balance of his claim.13 The ability of creditors to base their expectations on this principle, and to create appropriate arrangements to suit their particular needs, is one of the vital elements in the system of credit in both the domestic and the international context. Where such international arrangements break down, or encounter uncertainty, due to the differences between the rules contained in the domestic insolvency laws of the countries concerned, the destructive impact upon commercial

confidence can be especially acute, and the sensitive deployment of

12 The concept of binding a dissenting minority, provided the terms imposed are not unfairly discriminatory, is sometimes referred to as ‘cram-down’.

13 For a comparative survey of various kinds of real security, considered in the context of international insolvency, see Fletcher, above, n. 8, at pp. 289–291.

private international law techniques offers perhaps the last line of defence.14

Rival Principles of International Insolvency

Even though it is possible to discover an underlying concurrence between 1.11 domestic insolvency laws with regard to some of the most fundamental matters of principle, it must be acknowledged that the dissimilarities are

so numerous, and so substantial, as to oblige the realist to accept that the world essentially consists of separate, self-contained systems. When confronted by a case of insolvency containing international elements, national systems have responded by developing their rules of private international law, employing traditional techniques and concepts, to determine issues of jurisdiction, choice of law, and international recognition in conformity with locally accepted norms of decision. The ensuing diversity has been unusually intense, even by the standards of private international law, with the result that the quest for unifying principles has so far proved to be elusive. What can be discerned is an historic struggle between opposing principles, espoused at various times by different schools of thought whose global influence has fluctuated. In so far as a prevalent tendency seems to be emerging at the current time, the rate of progress is slow and the results uneven.

Until relatively recent times, doctrinal argument concerning the correct 1.12 basis of approach to be applied to questions of international insolvency could be broadly divided into two, polarized camps of opinion–– universalists and territorialists. The philosophical foundations of these opposing schools of thought are represented by two pairs of antithetical propositions. One pairing juxtaposes the principle of ‘Unity of Bankruptcy’ with its diametrical opposite––that of Plurality. The former principle, if strictly adhered to, would preclude any subdivision of insolvency proceedings into two or more distinct administrations governed by the laws

of separate states. The converse principle involves acceptance of the possibility of plurality of proceedings, their exact number and jurisdictional location to be determined by the circumstances of the instant case. In support of the principle of unity, it is urged that for every given debtor there should logically be a unified process of administration of the estate in the event of insolvency, with all interests and claims being channelled into the one process. This theory seems initially to be in fullest harmony

14 See, however, the less than satisfactory approach of the English court to the problems generated by irreconcilable national approaches to the pari passu principle (as applicable to the doctrine of set-off), in Re Bank of Credit and Commerce International S.A. (No.10) [1996] 4 All E.R. 796, discussed in Ch. 2 at para. 2.88 below.

with the principle of collectivity and the equal treatment of all creditors on a global basis. While it may be conceded that this appears to represent the ultimate ideal towards which we should be progressing, present reality suggests that its implementation would give rise to major difficulties, and real injustice. Since it is an inherent part of the doctrine of Unity that the process is opened at the place with which the debtor’s affairs, interests and general circumstances have their closest affinity, and that the administration is conducted in accordance with the insolvency law of that place,15 this raises the spectre that parties in other jurisdictions, whose dealings with the debtor may have been conducted mainly or exclusively with reference to their local law, may experience a defeat of their legitimate expectations due to the imposition of a different regime of law upon the occasion of the debtor’s insolvency. Moreover, the practical difficulties of dealing with property located in one jurisdiction from a distant operational base in another country may be such that it would be more cost-efficient to conduct a local administration in accordance with local law and procedure. Above all, it must be recognized that States are averse to allowing foreign laws to operate with extraterritorial effect in relation to property located within their jurisdiction. In the absence of specific treaty relationships formed out of established ties of trust between the States concerned, local rules of jurisdiction are likely to be deployed so as to enable local assets to be administered in accordance with the provisions of domestic law. In practice, therefore, the pragmatic attractions of plurality are likely to prevail over the more idealistic claims of the principle of Unity. What then remains is the task of discovering some framework within which the concurrent proceedings can be best coordinated in the interests of avoiding other forms of injustice such as discriminatory treatment of different groups of creditors dispersed among different countries. Some of the ways in which this challenge has been met, even if imperfectly, are explored later in this book.16

1.13The second pairing of antithetical propositions, from which the opposing schools of opinion derive their names, addresses the issue of the effects of insolvency proceedings opened under the law of a given State, and places the principle of ‘Universality of Bankruptcy’ in opposition to that of ‘Territoriality’. The former, as may readily be inferred, advances the claim that such proceedings enjoy worldwide––hence, ‘universal’––effect over

15The difficulties of determining the whereabouts of this ‘centre’ in a given case, and even the problems of selecting the criteria to be used for that purpose, should not be underestimated. These matters are further explored in Part II of this book.

16For nationally developed responses to the problem of coordinating plural proceedings see Ch. 2, at para. 2.132; Ch. 3, at para, 3.102; and Ch. 4 generally. International initiatives pursued by means of treaties or conventions, and other international instruments, are explored throughout Part II of this book.