The International Year in Review

Journal Issue:

Dec/Jan 2001

Column Name:

Journal Article:

ach year The International Scene looks back at the major international insolvency developments. This year has seen a number of major developments in cross-border insolvency cases and in the development of international and domestic cooperation in cross-border insolvency cases. Space limitations prevent a complete treatment of all of the developments during the past year, but this article is intended to comment on and highlight some of the more significant and important recent international insolvency developments.

Adoption of the UNCITRAL Model Law on Cross-border Insolvency

As reported in The International Scene last year, Mexico became the first major jurisdiction to enact the UNCITRAL Model Law on Cross-border Insolvency when it passed its new bankruptcy legislation in May 2000. The substance of the UNCITRAL Model Law is included in the proposed amendments to the U.S. Bankruptcy Code in the form of a new chapter 15.

In November 2000, South Africa became the second major jurisdiction to enact the Model Law. The major difference in South Africa is that the Model Law applies to countries that are "designated" by the government. This kind of designation can be withdrawn, but both the designation and the withdrawal of the designation require approval by the parliament of South Africa.

The United Kingdom has also passed legislation contemplating the adoption in England of the UNCITRAL Model Law. The process of bringing the Model Law into domestic U.K. insolvency legislation is complex and essentially requires administrative action by statutory regulation accompanied by a formal resolution of both the House of Commons and the House of Lords approving the adoption of the Model Law. The potential timing for the Model Law to be introduced in England has not yet been announced.

Earlier this year (and as reported in the July/August and October 2001 issues of the ABI Journal), Japan enacted international insolvency legislation based on the UNCITRAL Model Law. This legislation became effective in April 2001 and represents a major shift in Japanese insolvency systems and procedures away from the traditional territorial insolvency concepts that are common in civil law countries toward a much more universalist approach to multinational and cross-border insolvencies.

The new insolvency regulation is a major advance in international insolvency cooperation and is likely to have a major impact on insolvency and reorganizational proceedings in Europe and on the stakeholders involved in businesses that become subject to the regulation.

Development of the UNCITRAL Legislative Guide on Insolvency

As a result of a major International Insolvency Colloquium held in Vienna in December 2000 sponsored by UNCITRAL and Insol International in collaboration with the International Bar Association, UNCITRAL began work on a major project to develop a "Best Practices" guide to domestic insolvency legislation. Approximately 60 countries participated in the UNCITRAL project to create the UNCITRAL Legislative Guide on Insolvency. The intention is to produce an internationally accepted set of principles that would be a constructive guide to countries that are in the process of reforming their insolvency legislation or that are about to do so. The Legislative Guide would represent the views of countries around the world from a variety of different legal and social systems and would reflect a considered consensus on the most equitable and efficient manner in which domestic insolvency legislation could deal with major insolvency and reorganizational concepts. The text of the proposed Legislative Guide is available in its current draft from the UNCITRAL web site, www.uncitral.org, or from the author.

The European Union Regulation on Cross-border Insolvency

Negotiations for a Bankruptcy Convention among the members of the European Union began more than 30 years ago. Since that time, astonishing progress has been made toward integrating the economies of the European Union members. It may seem somewhat odd that, in the midst of so much economic and political progress, a European agreement on insolvency has proved so difficult to achieve. Several years ago, the European Union came close to adopting a convention on bankruptcy. Fourteen of the 15 members of the European Union signed the proposed European Union Bankruptcy Convention, which awaited only the signature of the United Kingdom to become effective. At that point, unfortunately, the first round of Mad Cow Disease emerged in the United Kingdom, and several members of the European Union banned British beef imports. Annoyed with that, the United Kingdom suspended its cooperation with European Union initiatives, including the virtually complete European Union Bankruptcy Convention. The deadline for signing the convention then passed without the United Kingdom's signature, and the prospective convention lapsed.

But it has now come back. As reported in the November 2001 issue of the Journal, as a result of subtle European legislative engineering, the convention has reappeared as a Regulation of the European Parliament. The new European Union Regulation on Insolvency Proceedings has a high degree of resemblance to the old bankruptcy convention. The difference is that the regulation will be effective throughout the European Union without the need for legislative action by the E.U.'s member states to adopt it. The new process essentially amounts to an end-run around the requirement for European legislative unanimity which (along with Mad Cow Disease) doomed the original European Union Bankruptcy Convention.

The European Union Insolvency Regulation is scheduled to come into effect on May 31, 2002. The new insolvency regulation is a major advance in international insolvency cooperation and is likely to have a major impact on insolvency and reorganizational proceedings in Europe and on the stakeholders involved in businesses that become subject to the regulation. (For a more detailed report on the insolvency regulation, see The International Scene article by Professor Bob Wessels in the November 2001 issue of the Journal.) Copies of the insolvency regulation are available electronically from the author for interested readers of The International Scene.

It should be noted that the insolvency regulation mandates a high level of cooperation and communication between trustees in main proceedings and trustees in secondary proceedings. Trustees (although the insolvency regulation uses the more European term "liquidator") are obliged to communicate with each other and must immediately communicate to the other administration any information that may be relevant to proceedings in the other jurisdiction. The regulation indicates, moreover, that subject to local rules to the contrary, trustees are "duty bound" to cooperate with each other.

The new insolvency regulation is likely to have a broader effect on non-European Union credit grantors than might have been expected. For creditors dealing with a business that is subject to the Insolvency Regulation, consideration will have to be given to the fact that in an insolvency, creditors from all countries of the European Union will be able to prove their claims against the debtor and that these claims will include tax claims and social claims. Moreover, subsidiaries incorporated abroad may fall within the scope of the insolvency regulation because they may well have their center of main interests within the European Union. There is certain to be scope for conflict between European Union administrations and non-European Union administrations where a particular company falls both within the insolvency regulation and within the jurisdiction of an overseas court.

Protocols in International Insolvency Cases

During the past year, the use of protocols in international cases continued to develop and expand. The first major protocol was developed in 1991-92 in Maxwell Communication between the United States and the United Kingdom, and the trend toward the use of protocols accelerated after the International Bar Association adopted its Cross-border Insolvency Concordat in 1995-96 as a set of principles to encourage cooperation and coordination of administrations involving more than one country. Since 1995, there have been 20-30 protocols entered into between courts in different countries dealing with cross-border insolvencies and reorganizations, and the trend toward the use of protocols shows no sign of abating. In fact, several major multinational reorganizations have featured cross-border insolvency protocols as part of their first-day orders. During the past year, significant protocols in multinational cases were entered into in cases in a number of different courts, e.g., between Toronto and New York, Vancouver and New York, Delaware and Toronto and between Toronto and Buffalo (which is a relatively short-range protocol, but which featured important international features nonetheless.) We intend to feature a complete listing of Cross-border Insolvency Protocols in a future column of The International Scene, and column readers who become aware of protocols are highly encouraged to forward them to the author.

The ALI Guidelines for Court-to-court Communications in Cross-border Cases

As previously reported in the Journal (see Volume XVIII, No. 10, December/January 2000), the American Law Institute (ALI), in its precedent-setting Transnational Insolvency Project, produced a Statement of Principles of Cooperation in Transnational Insolvency Cases involving the NAFTA countries of the United States, Canada and Mexico.

One of the most important elements in the Transnational Insolvency Project was the preparation of guidelines dealing with the communications that must take place between jurisdictions to enhance co-ordination and harmonization of administrations in cross-border or multinational insolvency cases. The project consequently produced its Guidelines for Court-to-court Communications in Cross-border Cases. The guidelines are, in fact, largely based on examples from actual cross-border cases involving cross-border insolvency protocols entered into between courts in different countries. The guidelines are intended to enhance coordination and harmonization of insolvency proceedings that involve more than one country through communications among the jurisdictions involved. The text of the ALI's Guidelines for Court-to-court Communications in Cross-border Cases is set out in full in the Journal article referred to above and can be found on ABI World (www.abiworld.org/abidata/online/journaltext/99decintl.html).

The Guidelines for Court-to-court Communications in Cross-border Cases from the Transnational Insolvency Project were adopted for the first time this year in two cross-border cases between Canada and the United States. In both cases, the guidelines were adopted as part of cross-border insolvency protocols that were entered into between the Canadian court and the bankruptcy court. From the U.S. side, the two cases involved the Delaware bankruptcy court (In re Matlack Systems Inc. (Bankr. D. Del. (Hon. Mary F. Walrath), 01-01114 (MFW), May 24, 2001)) and the U.S. Bankruptcy Court for the Southern District of New York (In re PSINet Inc. et al., (Bankr. S.D.N.Y.) (Hon. Robert E. Gerber), 01-13213, July 10, 2001). The application of the ALI guidelines in the Matlack and PSINet cases represents a significant step forward in international cooperation in cross-border cases and will set a very prominent example for other courts in other significant cross-border cases.

The Federal Judicial Center Monograph on International Insolvency

The Federal Judicial Center is an agency of the Judicial Branch whose mission is to provide training and continuing education for federal judges and court personnel. Part of the Judicial Center's work involves publishing monographs on various subjects of interest to federal judges.

One of the Federal Judicial Center's most recent areas of interest is international insolvency. The center is in the process of completing the publication of an International Insolvency Monograph, which will provide a reference for federal judges on the law governing insolvency cases with transnational dimensions. The material in the International Insolvency Monograph was written by four bankruptcy judges—Hon. Samuel Bufford, Hon. Louise DeCarl Adler, Hon. Sidney Brooks and Hon. Marcia Krieger, who also serve on the International Law Relations Committee of the National Conference of Bankruptcy Judges.

The monograph will be available shortly and will include the International Bar Association's Cross-border Insolvency Concordat, the UNCITRAL Model Law on Cross-border Insolvency and the European Union Regulation on Insolvency Proceedings. A limited number of copies of the International Insolvency Monograph will be available from the Federal Judicial Center through the center's Information Services Library, Thurgood Marshall Federal Judiciary Building, One Columbus Circle NE, Washington, D.C. 20002-8003, (202) 502-4153, fax (202) 502-4077.

The New U.K. Proposals for Financial Rehabilitations

The U.K. Department of Trade and Industry (DTI) has recently produced a series of recommendations that, if implemented, will bring about major changes in the insolvency and restructuring regime in England.

The most fundamental and most startling recommendation is to bring an end to private receivership as a major insolvency procedure. For the country that largely invented and developed the concept of private receivership, this is a very significant change of course. The proposals also recommend that the priority status of governmental claims be abolished in all insolvencies. Significant proposals for reform of insolvency procedures for personal and consumer bankruptcies are also proposed.

As a basis for the change in private receivership, the DTI report identified several areas in which it considers that the remedy of administration is preferable. Administration has no precise counterpart in U.S. practice. It involves the court's appointment of a licensed insolvency practitioner as an administrator who is responsible for running the business of the company during the administration. The process imposes an automatic stay of proceedings against creditors, and the administrator is required to submit proposals for a reorganization or a restructuring of the company to its creditors within three months. The administrator must convene a meeting of creditors at which the creditors can approve the proposals with or without amendments. Currently, the holder of floating charge security can effectively veto an administration by appointing a receiver, but the DTI proposals, as noted below, would eliminate this veto right.

The DTI recommendations for the elimination of the private receivership remedy center on concerns that private receivership does not provide adequate incentives to maximize economic values nor an acceptable level of transparency and accountability to creditors, and that it does not accommodate itself as well to international procedures and proceedings as does administration. The DTI report concludes that, as a matter of public policy, the insolvency system in England should move toward favoring "collective" insolvency proceedings (i.e., administrations) that allow all creditors to participate in the proceedings and that provide that insolvency administrators owe a duty of care to all creditors.

The intended rebalancing of the system is intended to be neutral to the interests of secured creditors who will be entitled to apply for an administration. The report also leaves open a possibility that administration proceedings may be extended to apply to the business of a foreign company in England. (It is now restricted to companies incorporated under English company legislation).

On the abolition of governmental claims, the report notes an international trend (including the examples of Australia and Germany) toward eliminating state preferences. Preferences for the claims of employees would be retained. The benefit of this abolition is intended to go to unsecured creditors, and where the assets of a business are subject to a floating charge, the report proposes a mechanism (which is not described) to achieve this result through "ringfencing" a portion of the "funds generated by the floating charge." The text of the report (Insolvency: A Second Chance) is available electronically at www.insolvency.gov.uk/compwp.htm.

Journal Date:

Saturday, December 1, 2001