By:
Greg Zipes
New York
Somewhat surprisingly, the inter-national community has yet to establish binding, uniform protocols for dealing with insolvencies of multinational companies. Instead, the "grab rule" generally prevails: domestic courts around the world, under the cover of local laws, tend to give local creditors or employees of the stricken company first dibs to the debtor's limited assets, often sacrificing the interests of equally worthy foreign creditors. Little thought is given to how best to maximize assets for all creditors. For those who are disturbed by this reality, change is slowly coming.
United States bankruptcy law has been held out as a model for those seeking to change the prevailing territorialism. Section 304 of the Bankruptcy Code provides that if a foreign bankruptcy proceeding has been filed, a foreign representative may start an ancillary, or secondary, proceeding in the United States to protect the integrity of the foreign proceeding. If a party in interest does not object, a U.S. bankruptcy court may enjoin an action by a local creditor against debtor property located in the United States that is the subject of the foreign proceeding or order the turnover of property of such estate to the foreign representative.
Section 304, for its progressive language, also contains language that could justify a territorial approach. In determining whether to accord relief to a foreign representative, Section 304 requires the U.S. bankruptcy court to first make a determination that claimholders in the United States will not be subject to, inter alia, "inconvenience" by the turnover of assets for disposition in a foreign proceeding. Further, the foreign proceeding must be similar to a bankruptcy proceeding in the United States, disallowing, for example, dispositions of property of the estate that prefer one creditor over another of the same type and distributing property of the estate to creditors substantially in accordance with the priority scheme under the U.S. Bankruptcy Code. However, the idea of avoiding "preferential" transfers, while integral to the U.S. bankruptcy system, is not accepted around the world. The priority scheme of the U.S. Bankruptcy Code is not universally accepted either. These 304 qualifications provide great escape routes for a U.S. bankruptcy court intent on protecting local creditors.
Further, Section 304 is limited in scope, not addressing how to coordinate independent proceedings commenced against a debtor in both the U.S. and another country. Often the "grab rule" is followed, but sometimes cooperation results. In re Maxwell Communication Corporation, which involved joint bankruptcy proceedings in the United States and England, provided a high point in cross-border cooperation and has proven to be influential in shaping attempts to institutionalize international cooperation.
The mysterious death of the mogul Robert Maxwell spawned litigation and ultimately the collapse of a family-owned international media empire. In 1991, dual insolvency proceedings were commenced in the United States and Great Britain by the company. The unique aspect of this case was the protocol which was approved in both the U.S. and British courts, on their own initiative, which permitted the parties in interest to work together to produce a common system of disposing of assets as going concerns and distributing proceeds to creditors. The courts cooperated to ensure that an orderly and non-duplicative review and payment of claims took place. They also deferred to each other's authority on certain litigation issues to ensure a smooth disposition of property. However, it is important to note that the success of the Maxwell case depended in large part on the individual judges. Nothing required the judges to create a protocol.
Section 304, as imperfect as it is, and the Maxwell case, have served as models for greater international efforts to coordinate cross-border insolvencies. In the Colloquium on Cross-Border Insolvency of the United Nations Commission on Inter-national Law, the statute and case were the subject of extensive discussion at different points in the proceeding. Composed of some 90 participants from various countries that included lawyers, accountants, judges and organizations interested in the issue, the Colloquium first met in 1994 and sought nothing less than to design a comprehensive insolvency code with an eye toward achieving substantive unification of disparate national bankruptcy laws.
Predictably, this ambitious goal was quickly abandoned in light of the widely varying bankruptcy systems around the world, and the Colloquium thereafter settled upon a limited agenda: (a) to develop an international system that facilitates cooperation and coordination between local judges in individual insolvency proceedings; and (b) to promote "access and recognition" of foreign representatives in a domestic bankruptcy proceeding. The purpose was to ensure that foreign creditors had a fair chance to assert their rights in a local bankruptcy proceeding. In In re Nakash and In re Everfresh, courts have loosely tracked the Colloquium's final language in developing their own international protocols, although there is again nothing that requires a bankruptcy court to adopt it as a model.
In short, the development of standard international insolvency law is still very much in its infancy. Until standardized laws are enacted. The resolution of the following issues that frequently arise in international bankruptcies will vary greatly depending upon the individual judge:
Determining which national law to apply to resolve disputes over discrete estate property, taking into account where the main proceeding is located. In the case of In re Granote County Club Co., Ltd., a U.S. court presiding in an ancillary proceeding to a Japanese bankruptcy case took a territorial approach, rejecting an argument to apply Japanese bankruptcy law to determine the validity of Colorado instruments of conveyance, and instead looked to Colorado law.
Determining the reach of a local bankruptcy court over foreign nationals, and the circumstances under which a court should refrain from deciding certain issues and defer to another court with concurrent jurisdiction. In In re Xacur, a U.S. bankruptcy court determined that it had jurisdiction over a Mexican national residing in the U.S. against whom an involuntary bankruptcy proceeding was commenced, and further determined that it should not refrain from exercising this jurisdiction even though civil proceedings had been instituted against the Mexican debtor in Mexico.
Determining the extent of a local country's automatic stay to protect local debtor in foreign jurisdictions. In In re Nakash, a U.S. bankruptcy court determined that an Israeli receiver who had previously appeared in the U.S. proceeding violated the automatic stay by filing an involuntary bankruptcy proceeding against the debtor in an Israeli court.
Until a uniform international regime is adopted, there will always be a degree of doubt as to how an individual court will handle each issue. One can speculate that, all things being equal, a domestic court would prefer to assist local creditors or a debtor, and will use any leeway currently existing to reach the desired result. As foreign creditors face unsympathetic local treatment on a expanding basis in a growing world economy, they may increasingly lobby for a uniform insolvency law. As a result, within the next ten years, the international insolvency regime may look substantially different than it does now.
