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

all property and interests of the debtor, wheresoever these may be found. Such transcendent ambitions encounter the same basic objections as the principle of Unity, namely that States do not readily concede that foreign laws can bring about extraterritorial effects as of right, and they are extremely cautious about committing themselves to allow such consequences to take place, even pursuant to the terms of a treaty. Thus, while it is not uncommon to find the national law expressed in terms which declare that the insolvency proceedings of that system shall enjoy universal effect, it is the author’s experience that no State has yet adopted, freely and unilaterally, a policy of according matching effect to insolvency proceedings conducted under the laws of foreign States. This is especially true in the case of immovable property located within the State in which such effects would be experienced.17 The converse principle, that of Territoriality, argues that the effects of insolvency proceedings are confined to such property as is located within the territorial jurisdiction of the country in which the proceedings are opened, and carries no consequences with respect to foreign assets of the debtor. In some rare instances––as in the case of Japan in former times––the principle of territoriality was strictly maintained in both outward and inward modes of operation, so that no extraterritorial effect was claimed on behalf of proceedings opened inside the country, and no effect was conceded within the domestic legal order as a result of proceedings opened under foreign law.18 The more usual approach however has been one whereby the State regards its own, domestic bankruptcy laws as producing universal effects, particularly if the debtor’s relationship with the country is a close one which enables the case to be classified as a ‘domiciliary’ proceeding. On the other hand, the notion of territoriality is applied towards foreign proceedings involving debtors with property or other interests which lie within the jurisdiction of the State in question: by denying the capability of the foreign proceedings to produce any effects regarding that part of the debtor’s patrimony, the way is left open for local actions to be taken by any party with standing to exercise rights over it.19 Thus it may be observed of the Territoriality principle that, while based upon the generally accepted view that the laws of each sovereign country cannot, of

17Cf. the approach of English law (which is otherwise among the most liberal in terms of willingness to accord extraterritorial effects to foreign bankruptcy proceedings), concerning the effect of foreign proceedings in relation to land in England: see Ch. 2 at para. 2.115; Ch. 3 at para. 3.95 below.

18See Makoto Ito in Fletcher, above, n. 8, ch. 9, esp. at pp. 180–183; cf. Matsushita (1997) 6 I.I.R. 210 at 212–18, 221–222. On the reform of Japanese law, and abandonment of the territoriality principle, see K. Yamamoto (2002) 11 I.I.R. 67; N. Kashiwagi (2000) 9 I.I.R. 205.

19See the account of the position under the law of The Netherlands provided by Dalhuisen in Fletcher, above, n. 8, ch. 10, esp. at pp. 187–188, 196–198; also the report on Swedish law by Bogdan, ibid., ch. 11, esp. at pp. 206–214.

themselves and as of right, produce effects within the territory of another sovereign and independent jurisdiction, it provides an unsatisfactory foundation for approaching the special problems generated by a crossborder insolvency. Since States cannot be persuaded to subscribe to the tenets of the Universality doctrine in its fullest and purest form, a middle way must be found.

1.14In the quest to devise an alternative solution to the problems of crossborder insolvency some modern scholars have advocated the acceptance of Territoriality as a ‘basic fact of international life’. Whether they are prepared to admit it or not (so it is argued) states ultimately aspire to administer the assets found within their own jurisdiction according to their own, domestic insolvency laws and procedures. Starting from this premise, Professor LoPucki and others have proposed a theory of ‘cooperative territorialism’ based on multilateral conventions whose purpose is to bridge the static and fragmented state of affairs that would be the consequence of each state’s law exercising exclusivity of control over the destiny of local assets.20 While the doctrine of co-operative Territoriality may initially appeal to national sensitivities about the intrusive aspects of international insolvency processes––notably the potential claim by a foreign-appointed liquidator or trustee to claim local assets on behalf of the general body of creditors participating in the foreign pro- ceedings––the theory encounters the serious objection that it gives rise to the consequence that creditors’ expectations of recovery would be affected by the chance location of the debtor’s assets at the moment of bankruptcy, which may bear no relation to the pattern of pre-bankruptcy conduct of the debtor through which the debts and liabilities have arisen. Unless some overarching principle can be introduced to ensure symmetrical treatment of all interests represented in the debtor’s insolvency, arbitrary and unjust results are unavoidable.

1.15An alternative approach to cross-border insolvency, and one which claims to break out of the historic antithesis between the universalist and territorialist camps, has been proposed by Professor Rasmussen under the title of ‘Contractualism’. This theory, which is particularly framed with reference to corporations, would allow each company to select the insolvency law by which to be governed in the event of its financial failure and default. The choice of law––considered as an aspect of contractual freedom––would be made in the company’s articles of incorporation and would be thereafter immutable unless its existing creditors gave their consent.21 Unfortunately this process involves a distortion of genuine

20L. LoPucki, 84 Cornell L. Rev. 696 (1999); the same author, 98 Mich. L. Rev. 2216 (2000). For a critical response see J.L. Westbrook, 98 Mich. L. Rev. 2276 (2000).

21R.K. Rasmussen, 19 Mich. J. Int’l L. 1 (1997); the same author, 71 Texas L. Rev. 51 (1992).

contractual principles under which parties freely arrive at consensus through bargaining and negotiation with a view to determining their mutual rights and duties. The debtor corporation’s ‘terms of engage- ment’––namely its choice of insolvency law regime––has already been determined in accordance with that party’s unilateral assessment of its own best interests at the time of its incorporation, a process in which its future creditors can play no active part. Moreover, the potential for exploitative choice of law by the debtor is high, as are the prospects for incompatibility of the standards and principles of the regulatory regime of corporate law to which the debtor company is subject while it functions in the period prior to bankruptcy, and those to be applied and enforced under the regime of insolvency law for which it has opted (assuming that to be the law of a different state). One cannot envisage this elective doctrine finding acceptance at international level.

A Pragmatic Approach: The Internationalist Principle

It is possible that a workable compromise can be devised through a 1.16 pragmatic combination of elements from the traditional doctrines which were previously considered, namely Universalism and Territorialism with their attendant, yet antithetical, principles of Unity and Plurality.

The basis of this proposed via media may be termed ‘the Internationalist Principle’, since it is predicated upon the truism that an international insolvency requires a collaborative response on the part of every State whose legal or material interests are somehow involved within the fabric of the case. First, the integrity of each system and its concerns must be properly respected, by recognizing that any process which takes place under the auspices of the legal system of one country can only produce effects within another country with the latter’s concurrence. In the absence of a special treaty, cross-border effects can take place only through the active interplay of rules of private international law. To that extent, the essence of Territoriality is conceded, but only up to a certain point. It is submitted that, in a world where States allow their citizens–– including companies formed under their laws––the freedom to have dealings and relationships which transcend national frontiers, to acquire and own foreign assets, and to transfer property between jurisdictions with relative ease, it becomes incumbent upon all States to play a responsible part in constructing rules of private international law that are in harmony with the realities of such cross-border activity. Under these circumstances, it is not appropriate for legal systems to maintain an insular detachment from the consequences of a multi-jurisdictional insolvency: law and practice must be modified where necessary, to enable the courts and other institutions of the State to respond in a positive way,

even while upholding the essential values of the system to which they belong.

1.17The second component of the proposed internationalist principle involves a modification of the doctrine of Universality so that it complements, rather than negates, the concept of Territoriality.22 What is required is that, at the culmination of the global operation to administer the insolvent debtor’s estate, there shall have been sufficient coordination between the various component parts of the administration that it amounts to de facto universality. This eschews the unattainable dogma associated with the traditional notions of Universality, which argue for extraterritorial effects to take place on a de iure basis. In place of this, the pragmatic approach aspires to work via the rules and processes of private international law and cross-border cooperation (between courts, and also between office holders in insolvency proceedings). By this means, the net outcome can be one in which the worldwide estate is completely administered, with all creditors having the right of participation at some point, and with the principle of collectivity supplying the ultimate basis of the solutions which are arrived at.

1.18Thirdly, the renunciation of cherished fundamentals also applies in relation to the Unity versus Plurality antithesis: neither of these should be allowed to occupy a dominant place in the approach to a cross-border case, but each should be regarded as a potential option to be employed according to circumstances. Thus, if the distribution of the debtor’s affairs is such that it would not be cost-efficient to conduct multiple proceedings, each administered according to the rules of local law, then it is demonstrably in the best interests of creditors, regarded as a whole, that a unitary proceeding should take place, thereby maximizing the value available for distribution. This is dependent upon there being sufficient flexibility within the law of the State in which the unitary proceedings are centred––including that State’s rules of conflict of laws––to enable suitable account to be taken of the localized interests of foreign creditors whose expectations have legitimately been based upon the provisions of some other State’s law. Conversely, if the logical conclusion, derived from an assessment of the pattern of dispersal of assets and claims and also of the complexity of the administrative process, is that the goals of convenience and efficiency will best be realized through plural administrations, then this should be preferred, subject to the proviso that the laws of

22 See J.L. Westbrook, above, n. 20, for a vigorous endorsement of an approach based on ‘modified universalism’ as offering the best short-term solution to the problems posed by international insolvencies in a world of diversified insolvency laws. For a variant approach, utilizing choice of law and comity considerations, see H. Buxbaum, 36 Stan. J. Int’l L. 23 (2000).

the States concerned are furnished with provisions to enable proper coordination and communication to take place between the respective administrations. The model which has become increasingly favoured in recent times is one which utilizes the concept of ‘primary’ and ‘secondary’ bankruptcy administrations which are linked by means of complementary sets of rules to ensure that a kind of de facto universality of administration is attained.23

The Internationalist principle is therefore one which aspires to realize, as 1.19 faithfully as is practicable in any given case of international insolvency,

the ideals of collectivity, equality of treatment for all creditors, and the respect for previously acquired rights, which as we have seen provide a unifying theme within the diversity of domestic insolvency laws. To achieve that objective, flexibility and pragmatism must be substituted for the dogmas so beloved of former ages. This entails a vital role for the judges within each State concerned, since it is only through their activism and initiative that the system can respond to the particular challenges posed by the circumstances of a live case.24 There is an established tradition among judges within the common law legal ‘family’ of extending international cooperation to each other in the name of the doctrine of ‘comity’. The underlying spirit which infuses that approach is also an integral part of the principle of Internationalism which is here advocated as a suitable approach towards the treatment of international insolvency in the early years of the Third Millennium.

1.3 HISTORIC ANTECEDENTS: THE INTERNATIONALIST TRADITION IN ENGLISH LAW

English law is usually considered to have remained largely impervious to 1.20 the development of the study and practice of private international law until the second half of the eighteenth century.25 Then, thanks largely to

the judicial activism of Lord Mansfield, a belated awakening took place via the practice of citation of Continental scholars’ writings during the

23See Hanisch (1993) 2 I.I.R. 151; Trautman, Westbrook, and Gaillard (1993) 41 A.J.C.L. 573; Balz (1996) 70 Am. Bankr. L. J. 485, esp. at 519–527.

24See Millett, above, n. 7.

25For accounts of the historic development of private international law, see M. Wolff,

Private International Law, 2nd edn. (1950), ch. 3; C.M. Schmitthoff, The English Conflict of Laws, 3rd edn. (1954), ch. 2; Cheshire and North, Private International Law, 13th edn. (1999), ch. 2; Sack, in Law: A Century of Progress 1835–1935, (1935), vol. 3, pp. 342–354; Lipstein (1972)

Hague Recueil des Cours, vol. I, pp. 104–166.

course of arguing cases before the English courts.26 This was eventually matched, almost a century later, by the development of an indigenous tradition of writings and commentaries on the conflict of laws for which the foundations were laid by Westlake,27 and later by Dicey.28 Among the judicial decisions of this formative period of English conflict of laws, several were concerned with cross-border insolvency. Many of these decisions are referred to in subsequent parts of this book, where they continue to serve as the basis of the present law.29 The observation that can be made at this point is that these early decisions contain the seeds of what can be justly acclaimed as an internationalist tradition spanning more than two centuries of English judicial development of international insolvency. For example, as early as 1764 the English court was prepared to rule that a foreign bankruptcy could have direct extraterritorial effect upon the bankrupt’s movable property situate within the jurisdiction of the English court.30 Other decisions dating from the same period establish the foundations of the doctrine of ‘Hotchpot’, whose purpose is to counteract the exploitation by individual creditors of any opportunities to obtain a relative advantage, at the expense of the general body of creditors, due to the dispersal of the debtor’s assets across several jurisdictions.31 Judicial concern that the debtor’s estate should be administered for the benefit of all creditors on a worldwide basis has been a motivating factor which has inspired many important initiatives over the years.

The Case of Odwin v. Forbes (1814–1817)

1.21If one were to select a single case to demonstrate the intuitive judicial affinity with the principle of internationalism, the proceedings in the case of Odwin v. Forbes have a strong claim to be chosen for this purpose. The case was originally decided in 1814 by the Court of Demerara and Essequibo, under the Presidency of Jabez Henry, whose judgment was subsequently confirmed by the Privy Council, sitting at the Cock Pit in

26See the landmark case of Robinson v. Bland (1760) 2 Burr. 1077, 97 E.R. 717; 1 Wm. Bl. 234, 96 E.R. 129 and 141. See also Mostyn v. Fabrigas (1774) 1 Cowp. 161, 98 E.R. 1021; Holman v. Johnson (1775) 1 Cowp. 341, both seminal decisions presided over by Lord Mansfield.

27The first edition of Westlake’s Private International Law was published in 1858. A 7th edition was published in 1925.

28The first edition of Dicey’s The Conflict of Laws was published in 1896. The current, 13th edition was published in 2000 under the General Editorship of Dr (now Sir) Lawrence Collins.

29See e.g. Ch. 2 at para 2.93 et seq., paras 2.107, and 2.124 below.

30Solomons v. Ross (1764) 1 Hy. Bl. 131n, 126 E.R. 79: this and other decisions from the same period are referred to in Ch. 2 at para 2.115 below.

31See e.g. Neale v. Cottingham (1764) 1 H. Bl. 132n, 126 E.R. 81; Sill v. Worswick (1791) 1 H. Bl. 665, 126 E.R. 379. The doctrine of Hotchpot is discussed in Ch. 2, at para 2.097.

London on 31 May 1817.32 The central issue in the case was the international effect of a certificate of discharge obtained through bankruptcy proceedings in England, by a debtor who subsequently went abroad and settled in the foreign and independent jurisdiction of Demerara. There he was sued by creditors whose debts had been provable in the English bankruptcy, and who had refrained from lodging proof of their claims despite having had notice of the proceedings. The defendant pleaded that the discharge obtained in England was a good and complete defence to the action in Demerara; the plaintiffs argued that English law had no force in the colony, due to the special arrangements for maintenance in force of the Dutch laws when the colony became a British possession.33 The Court unanimously concluded that the English discharge could not command the same direct force in Demerara as in its country of origin: though purporting to be of universal effect, it could only attain that objective in other jurisdictions on the basis of comity accorded by the foreign court under the authority of its own law. It was therefore necessary to investigate the provisions of Dutch law as the mother law of the colony, to determine whether it was the practice of the Dutch courts to give effect to foreign judgments. As those courts were disposed to take account of the extent to which their own determinations were accorded comity on a reciprocal basis by the courts of the other country, the Demerara court’s researches also included an appraisal of the jurisprudence of the English courts during the preceding half century, paying particular regard to the enforcement of judgments originating from Holland.34 Having satisfied itself that the state of the authorities in both jurisdictions was favourable to the exercise of comity, the court decided that it was bound to exercise similar comity towards the English discharge, and the plaintiffs’ action failed.

The decision in Odwin v. Forbes was remarkable in many ways. The 1.22 reasoning process on which the judgment of the first instance court was based has a maturity, and breadth of vision, that seems far ahead of

32Odwin v. Forbes (1817) 1 Buck. 57 (PC). The appeal was decided by Lord Chancellor Eldon, sitting with Vice-Chancellors Plumer and Leach. ‘The Cock Pit’ was the sobriquet applied to the block of buildings on the site of the former cockpit at Whitehall, later used for governmental purposes. Hence, in early 19th century usage, the term was a synonym for the Judicial Committee of the Privy Council, which used to meet in the building.

33Demerara had formerly been a Dutch colonial possession, where the system known as Romano-Dutch law was administered. The Dutch laws had been retained in force in the articles of capitulation at the time of surrender of the colony to the English.

34The case of Solomons v. Ross (above, n. 30) was a notable example of the according of extraterritorial effects in England to a Dutch bankruptcy judgment. A near-contemporary decision in which the English court had granted supportive remedies at the instance of Dutch-appointed curators of an Amsterdam merchant was Jollet v. Deponthieu (1769) 1 Hy. Bl. 132n, 126 E.R. 80.

its time. The sensitive recourse to the principle of comity is especially striking, and may be contrasted with the prevailing insularity of approach on the part of courts of the USA during the early nineteenth century when disposing of similar issues. Indeed, in the case of Ogden v. Saunders, decided by the United States Supreme Court in 1827, just ten years after the Privy Council had affirmed the judgment of the Court of Demerara, it was held that a foreign discharge in bankruptcy was no defence to an action by a creditor residing in the USA unless the creditor consented to the foreign court’s exercise of jurisdiction over the claim.35 Besides the intrinsic merits of the decision itself, the case of Odwin v. Forbes furnished the inspiration for the President of the Court, Jabez Henry, to undertake extensive scholarly research into the subject of international bankruptcy. This resulted in two significant publications which constitute the doctrinal foundation of the English tradition in this field. In 1823 he published in London a full account of the judgment of the Court over which he had presided in 1814, accompanied by copious accounts of the English and foreign authorities referred to in the course of the proceedings.36 The work comprises some 295 printed pages and offers a classic account of the spirit of approach for which the English courts at this period can justly take credit. Although extant copies are a considerable rarity, the book deserves an honoured place among the landmarks of the literature of cross-border insolvency. By the same token, its remarkable and learned author may be acclaimed as one of the founding fathers of the subject.37

1.23Jabez Henry continued to reflect upon his experiences in presiding over such a fascinating case of cross-border insolvency, and upon the lack of an agreed framework for courts to follow when dealing with such issues. In about 1825 he published a 14-page tract entitled Outline of Plan of an International Bankrupt Code for the Commercial States of Europe.38 His

35 Ogden v. Saunders, 25 US (12 Wheat.) 213 (1827). See also Harrison v. Sterry, 9 US (5 Cranch) 289 (1809). For a critical survey of the early American case law, see Riesenfeld (1976) 24 A.J.C.L. 288 at 290–295. The Supreme Court, albeit by a bare majority, was eventually persuaded to endorse the doctrine of comity in Hilton v. Guyot, 159 US 113, 40 L.Ed. 95, 16 S.Ct. 139 (1895).

36J. Henry, The Judgment of the Court of Demerara in the case of Odwin v. Forbes, to which is prefixed A Treatise on the Difference between Personal and Real Statutes, and its effect on foreign judgments and contracts, marriages and wills (London, 1823). The judgment occupies Part II of the book (pp. 86–178).

37For an illuminating assessment of the life and achievements of Jabez Henry, with useful bibliographical information, see D. Graham (2001) 10 I.I.R. 153–166.

38Published in London, printed by Cox and Baylis, Great Queen Street (hereafter: ‘Outline of Plan’). The pamphlet bears no date, but was published some time between 1823 and 1827. The copy held by the British Library bears the hand-written inscription: ‘To Jeremy Bentham Esq. with the author’s best respects’. For an appraisal, see Nadelmann (1961) 10 I.C.L.Q. 70.

proposal was largely motivated by the desire to overcome the frequent incidence of frauds practised upon ‘foreign and unrepresented creditors and absentees, by the facility and dispatch in obtaining a certificate and discharge, and the undue preference afforded in many cases’.39 Henry also perceived the benefits that an international, uniform code of bankruptcy could impart in the realm of trade and commerce, where certainty and predictability would place all participants on a footing of equality as to their rights, and would ‘enable every man, when trading with a foreigner, to know his risk and his remedy’.40 The fundamental principle of the proposed code was that the judge of the bankrupt’s domicile would be universally regarded as having competence to impose a forcible assignment of his property, wheresoever situate, and to grant a release from all liabilities that was co-extensive and co-effective with the divesting of his property. Henry was clearly drawing upon the lessons learnt in Odwin v. Forbes when he wrote that ‘to strip the bankrupt of his foreign property, and yet leave him exposed to the demands of his foreign creditors if he changes domicile, is certainly unjust: yet the English and other bankrupt laws affect to do this’.41 Henry’s proposal was that by an international treaty concluded by the major European commercial powers,42 certain aspects of bankruptcy could be divorced from their location in national law, and placed on an international footing so that they would provide fixed rules applicable to every case. He listed a total of 21 ‘chief points’, of which the following may be mentioned here:

(a)to determine what should constitute an act of bankruptcy, and its effect, to the divesting of the property out of the bankrupt by operation of law by this act, so as to render void all acts of ownership or dominion exercised afterwards;43

(b)to avoid undue preference by any local mode of proceeding, as by arrest, attachment, extents in aid, or otherwise, as is the case in some countries: and to make the arresting or attaching creditor, after an act of bankruptcy, a mere trustee for the others; he being, nevertheless, preferent for his costs;44

39Outline of Plan, above, n. 38, at p. 3.

40Ibid., p. 11.

41Ibid., p. 12. This insight by Henry is a most prophetic one, as was subsequently to be confirmed by the decision of the Court of Appeal in Gibbs & Sons v. La Société Industrielle et Commerciale des Métaux (1890) 25 Q.B.D. 399, critically discussed in Ch. 2 at 2.124 et seq., below.

42Holland, France, and England were regarded by Henry as the key participants in his proposed treaty.

43Outline of Plan, above, n. 38, Point 2 (p. 4).

44Ibid., Point 3 (p. 4).

(c)release and discharge of the bankrupt on a bona fide conformity to the bankrupt laws of his domicile. The duties and conduct required of the bankrupt to be defined on general principles, and rendered as nearly uniform in each state as possible;45

(d)to allow no trader to obtain a release by a fraudulent change of domicile;46

(e)a curator for foreign and unrepresented creditors and absentees to be appointed by the government of each state, as a public officer, with power to examine the bankrupt’s books and the bankrupt himself, as to his foreign debts and engagements, and to issue the notices to foreign creditors by advertisements in the gazettes of their respective states;47

(f)fugitive bankrupts to be given up by each state.48

The Unmet Challenge of International Insolvency

1.24Jabez Henry envisaged that, through the adoption of his proposed treaty, those engaged in international trade would become, in effect, quasisubjects of every state of Europe to which their dealings extended, and which were parties to the treaty. Thereby, the commercial and economic deployment of their property and interests would be complemented by the legal regime applicable to them. It is respectfully submitted that, some 180 years after the publication of these prescient ideas, the essential problems still await a complete resolution by concerted action among the commercially significant states of Europe and the world beyond. In later chapters of this book we will examine a number of such initiatives which have been pursued at the European level, and even globally.49 With the

45Ibid., Point 5 (p. 4).

46Ibid., Point 5 (p. 4). It may be noted that in his own published report of his judgment in Odwin v. Forbes (1814) (above, n. 32), Henry had found that the debt in that case, and the whole amount of the plaintiff’s claim and demand, originated in London, which was also the agreed place of payment, so that London was both the place of contracting and the place of performance. Moreover, the defendant’s domicile at the time of incurring the debt, and also at the time of his English bankruptcy, was in England (see pp. 164–165). Henry makes the telling observation that ‘this is not the case of a man, who after contracting debts in one country removes to another and there obtains his discharge’ (see p. 170). In Forbes’ case, England was, by intention and in fact, ‘the seat of his affairs and fortunes’ (sedes rerum ac fortunarum) (p. 165). Henry’s conceptualization of the debtor’s ‘seat of affairs’ anticipates by some 150 years the work of the authors of the conventions and the later Regulation produced by the Council of Europe and by the European Union, and also the UNCITRAL Model Law on Cross-Border Insolvency. These are considered in Chs. 6, 7, and 8 below.

47Outline of Plan, above, n. 38, Point 7 (p. 5); see also Points 10–12 (p. 6). The idea of a network of public officials responsible for ensuring that the debtor’s international estate is secured, and that creditors’ interests are properly safeguarded, is one which it would be worthwhile to revive for consideration under present-day conditions

48Ibid., Point 20 (p. 8).

49See Chs. 5 to 9 inclusive below.