Cross-border insolvency

Last updated December 11, 2020

Cross-border insolvency (sometimes called international insolvency) regulates the treatment of financially distressed debtors where such debtors have assets or creditors in more than one country.^[1] Typically, cross-border insolvency is more concerned with the insolvency of companies that operate in more than one country rather than bankruptcy of individuals. Like traditional conflict of laws rules, cross-border insolvency focuses upon three areas: choice of law rules, jurisdiction rules and enforcement of judgment rules.^[2] However, in relation to insolvency, the principal focus tends to be the recognition of foreign insolvency officials and their powers.

Theories of cross-border insolvency

There are, broadly, three approaches to the administration of cross-border insolvency:^[3]

The territorial approach, whereby each country exercises its own domestic insolvency laws in relation to all the debtor's property and all of the creditors located within its jurisdiction. This approach does not recognise any extraterritorial dimension to insolvency law.
The universalist approach (or universal approach), whereby any cross-border insolvencies are administered pursuant to a single global insolvency regime, and all of the debtor's assets are distributed by a single insolvency office holder, regardless where the assets or claimants are located.
Hybrid approach. A number of hybrid approaches exist in theory or practice, including:
- Modified universalism, whereby individual countries seek to identify the most relevant jurisdiction in which to conduct the proceedings, and all other states cooperate with and facilitate such proceedings (subject to limits of public policy);^[4] or
- Co-operative territorialism, which is broadly predicated on territorialist approach supplemented by multi-lateral conventions.^[5]

The universalist approach remains largely a holistic ideal and, for the most part, countries are divided into those with a purely territorial approach, and those that apply some form of hybrid approach.

Development

Historically, most legal systems have developed on a territorial basis, and this is as true in relation to bankruptcy laws as other areas. However, from an early stage there have been piecemeal attempts to develop cross-border cooperation in insolvency matters.^[6]

In 1889 seven treaties were signed in Montevideo with the aim to harmonising private international law in the signatory states (Argentina, Bolivia, Paraguay, Peru and Uruguay),^[7] one of which related to the regulation of bankruptcies between member states. The treaty was updated in 1930, and broadly provided for a system more closer to territorialism than universality, providing for multiple bankruptcy administrations in different states for multinational companies.^[8]
In 1933 Denmark, Finland, Iceland, Norway and Sweden signed into law the Nordic Bankruptcy Convention which, although not a lengthy document, is still in force today and facilitates administration of cross border bankruptcies in the Scandinavia region.^[9]
In the 1980s the International Bar Association published a model law, the Model International Insolvency Co-operation Act,^[10] but ultimately this model was not adopted by any country and the attempt was unsuccessful.

But from a comparatively early stage common law jurisdictions recognised the desirability of ensuring that insolvency officers from different jurisdictions received the necessary support to enable the efficient administration of estates. Under English law one of the earliest recorded cases was Solomons v Ross (1764) 1 H Bl 131n. In that case a firm in the Netherlands was declared bankrupt and assignees were appointed. An English creditor had brought garnishee proceedings in England to attach certain sums owing to the Dutch firm but Bathurst J held that the bankruptcy had vested all the firm's assets (including debts owed by English debtors) in the Dutch assignees, and the English creditor had to surrender the fruits of the garnishee proceedings and prove in the Dutch bankruptcy. In Re African Farms 1906 TS 373 an English company with assets in the Transvaal Colony was in winding-up in England, and the Chief Justice of the Transvaal confirmed that the English liquidator would be recognised and that "recognition which carries with it the active assistance of the court", and that active assistance could include: "A declaration, in effect, that the liquidator is entitled to deal with the Transvaal assets in the same way as if they were within the jurisdiction of the English courts, subject only to such conditions as the court may impose for the protection of local creditors, or in recognition of the requirements of our local laws." In Galbraith v Grimshaw [1910] AC 508 Lord Dunedin stated that there should be only one universal process of the distribution of a bankrupt's property and that, where such a process was pending elsewhere, the English courts should not let actions in its jurisdiction interfere with that process.^[11]

However, the first significant developments in relation to cross-border insolvency regimes which were widely adopted were (1) the UNCITRAL Model Law, and (2) the EC Regulation on Insolvency Proceedings 2000.

Modern regimes

Two current regimes for international insolvencies have been implemented on something wider than a regional basis: the UNCITRAL Model Law on Cross-Border Insolvency, and the EC Regulation on Insolvency Proceedings 2000.^[12] Both regimes locate the centre of main interest (or "COMI") of the debtor.

The UNCITRAL Model Law

The United Nations Commission on International Trade Law adopted a model law relating to cross-border insolvency on 30 June 1997.^[13] At present 46 jurisdictions have substantially implemented the Model Law into their domestic legislation, including a number of states with both significant economies and large volumes of cross border trade—such as the United States, Japan, the United Kingdom, Australia and Canada, as well as leading emerging economies such as Mexico and South Africa.

The basic concept of the Model Law is to establish what the "main proceedings" are in relation to any international insolvency. All other proceedings are referred to as the "non-main proceedings". The main proceedings are commenced where the debtor has its centre of main interest, or "COMI".^[13] Non-main proceedings may be commenced in any place where the debtor has a commercial establishment. The Model Law does not require reciprocity between states, but focuses upon (i) ensuring that states give assistance to insolvency officials from other countries in relation to main proceedings and non-main proceedings, and (ii) eliminating preferences for local creditors over international ones.^[14]

The following countries have substantially implemented the Model Law into their domestic legislation.^[15]

State	Date of Ratification	State	Date of Ratification
Australia	2008	Benin	2015
British Virgin Islands	2003^[16]	Burkina Faso	2015
Cameroon	2015	Canada	2005
Central African Republic	2015	Chad	2015
Chile	2013	Colombia	2006
Comoros	2015	Congo	2015
Côte d'Ivoire	2015	Democratic Republic of the Congo	2015
Equatorial Guinea	2015	Gabon	2015
Gibraltar	2014	Greece	2010
Guinea	2015	Guinea-Bissau	2015
Israel	2018	Japan	2000
Kenya	2015	Malawi	2015
Mali	2015	Mauritius	2009
Mexico	2000	Montenegro	2002
New Zealand	2006	Niger	2015
Philippines	2010	Poland	2003
South Korea	2006	Romania	2002
Senegal	2015	Serbia	2004
Seychelles	2013	Singapore	2017
Slovenia	2007	South Africa	2000
Togo	2015	Uganda	2011
United Kingdom	2006^[17]	United States	2005^[18]
Vanuatu	2013

EC Regulation on Insolvency Proceedings 2000

The EC Regulation on Insolvency Proceedings 2000 was passed on 29 May 2000 and came into effect on 31 May 2002.^[19] The EC Regulation, as its name applies, operates between member states of the European Union, and focuses upon creating a framework for the commencement of proceedings and for the automatic recognition and co-operation between the different member states. Unusually for a European regulation, the EC Insolvency Regulation does not seek to harmonise insolvency laws between the different member states.

Like the UNCITRAL Model Law, the EC Regulation also employs the concept of a centre of main interest (or "COMI"). The definition of the COMI is left to member states in their implementation of the Regulation, but paragraph (13) of the preamble states: 'The "centre of main interests" should correspond to the place where the debtor conducts the administration of his interests on a regular basis and is therefore ascertainable by third parties.' If the COMI of an entity is outside of the European Union then the insolvency proceedings are not subject to the Regulation.^[20] In relation to companies there is a presumption that the registered office is the COMI of the company, but this presumption can be (and often is) rebutted.^[21]

The EU Regulation does not define insolvency, but it does define insolvency proceedings as "...collective insolvency proceedings which entail the partial or total divestment of a debtor and the appointment of a liquidator."^[22] Article 3 divides proceedings into main proceedings and territorial proceedings. Main proceedings are accorded extraterritorial effect throughout the European Union. One of the concerns expressed in relation to the EC Regulation is that (other than a reference to the European Court of Justice) it provides no mechanism for determining which set of proceedings are the main proceedings if two or more jurisdictions claim their proceedings are the main proceedings.^[23]^[24]

Areas of conflict

In any attempt to harmonise or facilitate cross-border administration of insolvent companies, national insolvency regimes can take widely divergent approaches on certain key points:

Secured creditors. Whether or not bankruptcy proceedings operate as a stay upon the enforcement of secured creditor's rights as a fundamental determinant in relation to the manner of conduct of any proceedings
Corporate rehabilitation regimes. Bankruptcy systems predicated on trying to rehabilitate companies (such as Chapter 11 in the United States, or administration orders in the United Kingdom) are fundamentally different in intent and effect to winding-up regimes that seeks to liquidate companies and distribute the proceeds to creditors.
Set-off rights. Whilst certain countries allow creditors who have mutual claims with the debtor to set-off those claims in full, others require the creditors to pay any sums owed to the debtor in full before claiming in the proceedings. Within jurisdictions that do permit set-off, variations may arise as to whether set-off must be on an individual or group basis.^[25]

Related Research Articles

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Default (finance) failure to meet the conditions of a loan

In finance, default is failure to meet the legal obligations of a loan, for example when a home buyer fails to make a mortgage payment, or when a corporation or government fails to pay a bond which has reached maturity. A national or sovereign default is the failure or refusal of a government to repay its national debt.

Personal bankruptcy law allows, in certain jurisdictions, an individual to be declared bankrupt. Virtually every country with a modern legal system features some form of debt relief for individuals. Personal bankruptcy is distinguished from corporate bankruptcy.

In law, receivership is a situation in which an institution or enterprise is held by a receiver—a person "placed in the custodial responsibility for the property of others, including tangible and intangible assets and rights"—especially in cases where a company cannot meet its financial obligations and is said to be insolvent. The receivership remedy is an equitable remedy that emerged in the English chancery courts, where receivers were appointed to protect real property. Receiverships are also a remedy of last resort in litigation involving the conduct of executive agencies that fail to comply with constitutional or statutory obligations to populations that rely on those agencies for their basic human rights.

Insolvency is the state of being unable to pay the debts, by a person or company (debtor), at maturity; those in a state of insolvency are said to be insolvent. There are two forms: cash-flow insolvency and balance-sheet insolvency.

A fraudulent conveyance, or fraudulent transfer, is an attempt to avoid debt by transferring money to another person or company. It is generally a civil, not a criminal matter, meaning that one cannot go to jail for it, but in some jurisdictions there is potential for criminal prosecution. It is generally treated as a civil cause of action that arises in debtor/creditor relations, particularly with reference to insolvent debtors. The cause of action is typically brought by creditors or by bankruptcy trustees.

Bankruptcy in the United Kingdom is divided into separate local regimes for England and Wales, for Northern Ireland, and for Scotland. There is also a UK insolvency law which applies across the United Kingdom, since bankruptcy refers only to insolvency of individuals and partnerships. Other procedures, for example administration and liquidation, apply to insolvent companies. However, the term 'bankruptcy' is often used when referring to insolvent companies in the general media.

A security interest is a legal right granted by a debtor to a creditor over the debtor's property which enables the creditor to have recourse to the property if the debtor defaults in making payment or otherwise performing the secured obligations. One of the most common examples of a security interest is a mortgage: a person borrows money from the bank to buy a house, and they grant a mortgage over the house so that if they default in repaying the loan, the bank can sell the house and apply the proceeds to the outstanding loan.

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As a legal concept, administration is a procedure under the insolvency laws of a number of common law jurisdictions, similar to bankruptcy in the United States. It functions as a rescue mechanism for insolvent entities and allows them to carry on running their business. The process – in the United Kingdom colloquially called being "under administration" – is an alternative to liquidation or may be a precursor to it. Administration is commenced by an administration order.

United Kingdom insolvency law regulates companies in the United Kingdom which are unable to repay their debts. While UK bankruptcy law concerns the rules for natural persons, the term insolvency is generally used for companies formed under the Companies Act 2006. "Insolvency" means being unable to pay debts. Since the Cork Report of 1982, the modern policy of UK insolvency law has been to attempt to rescue a company that is in difficulty, to minimise losses and fairly distribute the burdens between the community, employees, creditors and other stakeholders that result from enterprise failure. If a company cannot be saved it is "liquidated", so that the assets are sold off to repay creditors according to their priority. The main sources of law include the Insolvency Act 1986, the Insolvency Rules 1986 ), the Company Directors Disqualification Act 1986, the Employment Rights Act 1996 Part XII, the Insolvency Regulation (EC) 1346/2000 and case law. Numerous other Acts, statutory instruments and cases relating to labour, banking, property and conflicts of laws also shape the subject.

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<i>Companies Creditors Arrangement Act</i>

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The Insolvency Regulation is an EU Regulation concerning the rules of jurisdiction for opening insolvency proceedings in the European Union. It determines which member states' courts have jurisdiction.

Insolvency law of Russia mainly includes Federal Law No. 127-FZ "On Insolvency (Bankruptcy)" and Federal Law No. 40-FZ "On Insolvency (Bankruptcy) of Credit Institutions". Federal Law No. 127-FZ "On Insolvency (Bankruptcy)" dated 26 October 2002, replacing the previous law in 1998, to better address the above problems and a broader failure of the action. Russian insolvency law is intended for a wide range of borrowers: individuals and companies of all sizes, with the exception of state-owned enterprises, government agencies, political parties and religious organizations. There are also special rules for insurance companies, professional participants of the securities market, agricultural organizations and other special laws for financial institutions and companies in the natural monopolies in the energy industry. Federal Law No. 40-FZ "On Insolvency (Bankruptcy) of Credit Institutions" dated 25 February 1999 contains special provisions in relation to the opening of insolvency proceedings in relation to the credit company. Insolvency Provisions Act, credit organizations used in conjunction with the provisions of the Bankruptcy Act.

British Virgin Islands bankruptcy law is principally codified in the Insolvency Act, 2003, and to a lesser degree in the Insolvency Rules, 2005. Most of the emphasis of bankruptcy law in the British Virgin Islands relates to corporate insolvency rather than personal bankruptcy. As an offshore financial centre, the British Virgin Islands has many times more resident companies than citizens, and accordingly the courts spend more time dealing with corporate insolvency and reorganisation.

Cayman Islands bankruptcy law is principally codified in five statutes and statutory instruments:

Modified universalism or modified universality is a legal concept relating to the general principle that in relation to corporate insolvency national courts should strive to administer the estate of insolvent companies in the spirit of international comity. The broad concept is that it is desirable for cross-border insolvencies to be managed by a single officeholder as a single estate rather than a series of piecemeal and unconnected proceedings in different countries, and that this should be recognised globally. In practice, whilst many countries will recognise foreign bankruptcy proceedings, in many instances the courts have set some limits on the recognition of insolvency proceedings, such that the courts apply this principle of modified universality whereby the courts retain a discretion to assess whether the overseas proceedings are consistent with their own principles of justice and public policy. But, subject to that safeguard, the courts will generally defer to the proceedings which are regarded as the "main proceedings" for the purposes of getting in and distributing assets of the insolvent company. The principal is referred as to modified universalism in that it strives to find a balance between purely territorial bankruptcy systems, and entirely universal international bankruptcy system.

The UNCITRAL Model Law on Cross-Border Insolvency was a model law issued by the secretariat of UNCITRAL on 30 May 1997 to assist states in relation to the regulation of corporate insolvency and financial distress involving companies which have assets or creditors in more than one state.

Hong Kong insolvency law regulates the position of companies which are in financial distress and are unable to pay or provide for all of their debts or other obligations, and matters ancillary to and arising from financial distress. The law in this area is now primarily governed by the Companies Ordinance and the Companies Rules. Prior to 2012 Cap 32 was called the Companies Ordinance, but when the Companies Ordinance came into force in 2014, most of the provisions of Cap 32 were repealed except for the provisions relating to insolvency, which were retained and the statute was renamed to reflect its new principal focus.

References

↑ Ian Fletcher (2005). Insolvency in Private International Law (2nd ed.). Oxford University Press. ISBN 978-0199262502.
↑ Andrew Keay and Peter Walton (2011). Insolvency Law (2nd ed.). Jordans. p. 385. ISBN 978-1846611193.
↑ Andrew Keay and Peter Walton (2011). Insolvency Law (2nd ed.). Jordans. p. 386. ISBN 978-1846611193.
↑ Jay Westbrook (2000). "Global Solution to Multinational Default" (PDF). Michigan Law Review . 98: 2276. doi:10.2307/1290306. Archived from the original (PDF) on 23 June 2015.
↑ Lynn LoPucki (1999). "Cooperation in International Bankruptcy: A Post-Universalist Approach" (PDF). Cornell Law Review . 86: 696.
↑ Andrew Keay and Peter Walton (2011). Insolvency Law (2nd ed.). Jordans. p. 387. ISBN 978-1846611193.
↑ Wyndham Bewes. "The Treaties of Montevideo (1889)". JSTOR 742785.Missing or empty |url= (help)
↑ Philip Wood (2007). Principles of International Insolvency. 29-080: Sweet & Maxwell. ISBN 9781847032102 . Retrieved 23 June 2015.CS1 maint: location (link)
↑ Carl Hugo Parment. "The Nordic Bankruptcy Convention - An Introduction" (PDF). Archived from the original (PDF) on 23 June 2015. Retrieved 23 June 2015.
↑ Elizabeth Somers (2011). "The Model International Insolvency Cooperation Act: An International Proposal for Domestic Legislation". American University International Law Review . 6 (4): 677.
↑ "Now so far as the general principle is concerned it is quite consistent with the comity of nations that it should be a rule of international law that if the court finds that there is already pending a process of universal distribution of a bankrupt's effects it should not allow steps to be taken in its territory which would interfere with that process of universal distribution." at 513
↑ No 1346/2000
1 2 "UNCITRAL Model Law on Cross-Border Insolvency (1997)". UNCITRAL. Retrieved 7 June 2015.
↑ Model Law, Article 13, paragraph 2
↑ "Status - UNCITRAL Model Law on Cross-Border Insolvency (1997)". UNCITRAL. Retrieved 21 June 2018.
↑ Although the British Virgin Islands has enacted provisions of the Model Law as Part XVIII of the Insolvency Act, 2003 (which came into force on 1 January 2004), that Part has not yet been brought into force. See generally: British Virgin Islands bankruptcy law.
↑ See United Kingdom insolvency law - International insolvency
↑ See Chapter 15, Title 11, United States Code.
↑ "Council regulation (EC) No 1346/2000 of 29 May 2000 on insolvency proceedings". Eur-Lex. Retrieved 23 June 2015.
↑ Re the Arena Corporation Ltd [2003] EWHC 3032 (Ch.), affirmed on appeal ([2004] EWCA Civ 371).
↑ Re AIM Underwriting Agencies [2004] EWHC Civ 2114; Re TXU Europe German Finance BV [2005] BCC 90.
↑ Article 1(1).
↑ Re Eurofood IFSC Ltd (Case C-341/04), [2006] ECR 1-701
↑ Andrew Keay and Peter Walton (2011). Insolvency Law (2nd ed.). Jordans. p. 400. ISBN 978-1846611193.
↑ In an insolvent liquidation, banks who provide loan finance are often key creditors. Similarly, most companies also have cash-at-bank as one of their assets. The ability of banks to set-off those sums can be a material factor.

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[1] Ian Fletcher (2005). Insolvency in Private International Law (2nd ed.). Oxford University Press. ISBN 978-0199262502.

[2] Andrew Keay and Peter Walton (2011). Insolvency Law (2nd ed.). Jordans. p. 385. ISBN 978-1846611193.

[3] Andrew Keay and Peter Walton (2011). Insolvency Law (2nd ed.). Jordans. p. 386. ISBN 978-1846611193.

[4] Jay Westbrook (2000). "Global Solution to Multinational Default" (PDF). Michigan Law Review . 98: 2276. doi:10.2307/1290306. Archived from the original (PDF) on 23 June 2015.

[5] Lynn LoPucki (1999). "Cooperation in International Bankruptcy: A Post-Universalist Approach" (PDF). Cornell Law Review . 86: 696.

[6] Andrew Keay and Peter Walton (2011). Insolvency Law (2nd ed.). Jordans. p. 387. ISBN 978-1846611193.

[7] Wyndham Bewes. "The Treaties of Montevideo (1889)". JSTOR 742785.Missing or empty |url= (help)

[8] Philip Wood (2007). Principles of International Insolvency. 29-080: Sweet & Maxwell. ISBN 9781847032102 . Retrieved 23 June 2015.CS1 maint: location (link)

[9] Carl Hugo Parment. "The Nordic Bankruptcy Convention - An Introduction" (PDF). Archived from the original (PDF) on 23 June 2015. Retrieved 23 June 2015.

[10] Elizabeth Somers (2011). "The Model International Insolvency Cooperation Act: An International Proposal for Domestic Legislation". American University International Law Review . 6 (4): 677.

[11] "Now so far as the general principle is concerned it is quite consistent with the comity of nations that it should be a rule of international law that if the court finds that there is already pending a process of universal distribution of a bankrupt's effects it should not allow steps to be taken in its territory which would interfere with that process of universal distribution." at 513

[12] No 1346/2000

[uncitral-13] 1 2 "UNCITRAL Model Law on Cross-Border Insolvency (1997)". UNCITRAL. Retrieved 7 June 2015.

[14] Model Law, Article 13, paragraph 2

[Countries-15] "Status - UNCITRAL Model Law on Cross-Border Insolvency (1997)". UNCITRAL. Retrieved 21 June 2018.

[16] Although the British Virgin Islands has enacted provisions of the Model Law as Part XVIII of the Insolvency Act, 2003 (which came into force on 1 January 2004), that Part has not yet been brought into force. See generally: British Virgin Islands bankruptcy law.

[17] See United Kingdom insolvency law - International insolvency

[18] See Chapter 15, Title 11, United States Code.

[ECReg-19] "Council regulation (EC) No 1346/2000 of 29 May 2000 on insolvency proceedings". Eur-Lex. Retrieved 23 June 2015.

[20] Re the Arena Corporation Ltd [2003] EWHC 3032 (Ch.), affirmed on appeal ([2004] EWCA Civ 371).

[21] Re AIM Underwriting Agencies [2004] EWHC Civ 2114; Re TXU Europe German Finance BV [2005] BCC 90.

[22] Article 1(1).

[23] Re Eurofood IFSC Ltd (Case C-341/04), [2006] ECR 1-701

[24] Andrew Keay and Peter Walton (2011). Insolvency Law (2nd ed.). Jordans. p. 400. ISBN 978-1846611193.

[25] In an insolvent liquidation, banks who provide loan finance are often key creditors. Similarly, most companies also have cash-at-bank as one of their assets. The ability of banks to set-off those sums can be a material factor.

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