The International Year in Review

The International Year in Review

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It has been an eventful year for international insolvency as the trend toward economic globalization continues to manifest itself very visibly in the international insolvency area. Less than a dozen years ago, it was reasonably unusual to find reorganizations or insolvencies that had significant international connections. But now, it is unusual to find a major case that does not have significant international aspects, and this trend is certain to accelerate.

This article looks at some of the significant developments over the past year that have impacted the international insolvency area. The UNCITRAL Model Law on Cross-border Insolvency was adopted in Mexico (as described in The International Scene column in the September 2000 issue) and shows signs of moving toward adoption in England as well as a number of other countries. The acceptance of modern technology has led to several joint cross-border hearings between courts in different countries (primarily the United States and Canada) through the use of satellite television facilities, which would not have happened even a very short time ago. Bankruptcy courts have tended to continue their developing cooperation with courts in other countries in multinational and cross-border cases. This article focuses on only a few of the major developments in the international insolvency area in the last several months and describes current initiatives that are likely to proceed and evolve as we proceed into 2001.

The European Union Insolvency Regulation

Readers of The International Scene will recall that European aspirations for a European insolvency convention foundered in 1996. Cynical observers have always considered that the prospective convention was actually a victim of "Mad Cow Disease" because the U.K. (which at the time had not signed the prospective convention and was offended by European restrictions on the import of British beef) had gone into a period of non-cooperation with European initiatives that unfortunately at that point included the proposed European Bankruptcy Convention. Through some judicious maneuvering at the highest levels of the European Union Council of Ministers, however, the late-departed convention has now been revived in the form of a European Union (EU) Regulation.

Although the EU political process is highly technical, there are some substantive advantages to proceeding with this kind of regulation. As a treaty, the European Union Bankruptcy Convention would have required each of the signatory countries to proceed to enact it through their normal legislative processes before it could come into effect. As a regulation adopted by the European Union Council of Ministers under the European Union Convention, it will take effect in EU member states without the need for domestic-enabling legislation. The date currently fixed for the convention/regulation to come into force is May 31, 2002. In European insolvency cases, the new regulation gives administrative precedence to insolvency proceedings that are commenced in the jurisdiction of the debtor's "center of main interests." Ancillary proceedings may be taken in other member states, but the effect of those ancillary proceedings is restricted to assets of the debtor situated within the other state.

The adoption of the new European Union Insolvency Regulation is a major step forward in international insolvency co-operation, and its operation will be watched with great interest by insolvency professionals and those involved in the international credit area.

U.K. Consideration of the UNCITRAL Model Law

Readers of The International Scene will recall that in May of this year, Mexico became the first major jurisdiction to enact the UNCITRAL Model Law on Cross-border Insolvency. Readers will also recall that the substance of the Model Law is contained in chapter 15 of the proposed amendments to the Bankruptcy Code.

Earlier this year, legislation was introduced into Parliament in London that contemplates 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. A blue-ribbon committee has been established to consider the impact of the adoption of the Model Law on existing U.K. insolvency legislation, and the date for the Model Law coming into force in England has not yet been set.

In addition to the United States, countries that are presently contemplating the enactment of the Model Law include Australia, New Zealand, South Africa and Canada. The International Scene will follow the progress of the adoption of the Model Law in the U.K. and will report on further developments in a forthcoming issue of the Journal.

Recognition of a Foreign Receiver Under §304

Section 304 of the Bankruptcy Code seems directed toward providing assistance to bankruptcy administrations in other countries, but a decision in Texas has indicated that it might not be necessary to construe §304 that narrowly. The applicant for §304 relief was a receiver that had been appointed over the business of a Canadian debtor by the Alberta Court of Queen's Bench. As with most Canadian provinces, the legislative jurisdiction to appoint a receiver over a business is a matter of provincial, rather than federal, law and does not involve the federal government's bankruptcy jurisdiction. The provincial jurisdiction is based on statutory provisions that allow the court to appoint a receiver, where, simply, the court is persuaded that it is "just and convenient" for a receiver to be appointed.

The bankruptcy court held that, under the circumstances, the Canadian receiver fell within the definition of a foreign insolvency representative and was consequently granted relief under §304. In re Fracmaster Ltd. 237 B.R. 627 (Bankr. E.D. Tex. 1999).

Foreign Representatives in Canadian International Insolvency Practice

When Canadian insolvency legislation was amended in 1997 to add provisions dealing with the recognition of foreign insolvency proceedings and foreign insolvency representatives, the amendments maintained the skepticism that is apparent in a number of countries about the bona fides of debtors-in-possession. Foreign courts occasionally have some difficulty in accepting that an entity that appears to be the same organization as it was prior to the filing of a bankruptcy case can thereafter owe fiduciary responsibilities to creditors to whom it has already failed to honor its commitments.

In that vein, the 1997 Canadian provisions essentially required that a foreign representative be a court-appointed officer operating under the authority of the foreign court. The intention seemed to have been to exclude the debtor-in-possession from being its own foreign representative in a Canadian proceeding. There are some signs that the legislative rigidity of this position is being softened by its judicial consideration. In a recent case involving a chapter 11 filing in Nevada and a companion Companies' Creditors Arrangement Act (CCAA) filing in Toronto, the Ontario bankruptcy court in fact recognized an independent "responsible officer" appointed in the chapter 11 case as fulfilling the requirements for a foreign representative under the international insolvency provisions of the CCAA. Re Agri Bio Tech Inc. (unreported, Ontario Superior Court, May 2000).

On the other hand, a lower court in Alberta earlier this year refused to recognize the order made in the Singer reorganization in the Southern District of New York appointing foreign representatives and seeking the cooperation of courts in jurisdictions where Singer and its subsidiaries carried on business. The Alberta court, taking the conventional conflict of laws view of issues in international insolvency cases, seems to have avoided the cooperation that usually is exhibited by the courts of the United States and Canada for each other and concluded that it would not take any steps to restrain Canadian creditors from pursing their claims against Singer's Canadian subsidiary. Apparently, if the Canadian subsidiary needed protection, it could seek protection under Canadian bankruptcy legislation. This decision illustrates that international cooperation in insolvency cases is still not something that can be readily taken for granted.

Worldwide Ancillary Injunctions Supporting Foreign Reorganizations

In two recent instances, bankruptcy courts have assisted in Canadian reorganizations involving debtors with operations and assets in the United States. In both cases, the Canadian-based debtor had commenced reorganizational proceedings under the Canadian CCAA. Both debtors, however, had substantial operations (and creditors) in the United States, but for different reasons they were not prepared to commence full chapter 11 proceedings. The solution that each of them reached independently was to apply to the bankruptcy court in the district in which most of their U.S.-based assets were centered for an order in aid of the Canadian reorganizational proceedings that would restrain creditors in the United States from taking proceedings against the debtors' U.S. assets. The bankruptcy courts in each case presumably considered these applications to be non-controversial, and injunctions were granted in each case to restrain U.S.-based creditors from pursuing their remedies against the debtors' U.S.-based assets. However, neither court issued a formal opinion in support of its order. The first case, In re Canadian Airlines International Limited (Bankr. D. Hi. March 2000), involved Canada's second-largest airline, and the other, In re Euro United Corp. (Bankr. W.D.N.Y. January 2000), involved a major Toronto-based manufacturing concern.

A Worldwide Temporary Restraining Order to Protect Foreign Subsidiaries

In what may be an unprecedented order, the Delaware bankruptcy court in the recent Owens Corning case issued a temporary restraining order directed at a variety of international and domestic financial institutions to restrain them from taking any actions or pursuing any remedies against the debtor's foreign subsidiaries. The order was exceptionally broad and restrained the defendant institutions from exercising any enforcement rights or remedies under the applicable credit agreement or under any other agreement between the parties or under any other applicable law (with some minor technical exceptions). The scope of the order is best illustrated by the fact that it was directed against more than 50 major international institutions with regard to more than 100 Owens Corning subsidiaries in 20 countries around the world. The order was not opposed by the lenders involved, and a form of cooperative standstill seems to have been developing in the case. However, the issues relating to the order and the injunction sought by the debtor are still current and outstanding before the bankruptcy court. In re Owens Corning (Bankr. D. Del. Case No. 00-03837, Oct. 10, 2000).

The Forthcoming UNCITRAL International Insolvency Colloquium

Two other significant initiatives on the international insolvency scene will be considered at a major International Insolvency Colloquium to be hosted in Vienna, Austria, in December by UNCITRAL and INSOL International in collaboration with the International Bar Association. It was a similar UNCITRAL colloquium in Vienna in April 1994 that produced the impetus that eventually became the Model Law on Cross-border Insolvency, and the forthcoming colloquium will focus on the major new initiatives that are emerging in the international area.

One important initiative that will be considered is the Statement of Principles for a Global Approach to Multi-creditor Workouts, produced by the INSOL Lenders Group. The principles are intended to form the basis for cooperation and coordination by lending institutions that are involved in major cross-border insolvencies and restructurings. The Lenders Group is an impressive group; it is chaired by HSBC Business Loans Inc. and comprises members from Barclays (as vice chair), Deutsche Bank, NatWest, I.B.J., Credit Agricole and the British Bankers' Association.

UNCITRAL will also consider at its International Insolvency Colloquium a proposal emanating from the UNCITRAL Working Group of the Department of State (chaired by Harold S. Burman, Washington, D.C.). The Working Group has produced a proposal for the development of a system that would facilitate and enhance voluntary out-of-court restructurings in multinational cases. The proposal is for the development of model legislation that would facilitate out-of-court restructurings on an international scale.

Editor's Note: Readers of the Journal who have been involved in cases with interesting cross-border elements that they would like to share with our members are warmly encouraged to contact Bruce Leonard with their suggestions at [email protected] or by fax at (416) 640-3027. Copies of the INSOL Lenders Group Statement of Principles for a Global Approach to Multi-creditor Workouts and the State Department Working Group's Proposal for a Model Voluntary Cross-border Restructuring Statute are available from the author on request. The International Scene will report further in a future issue of the Journal on the results of the UNCITRAL International Insolvency Colloquium and the progress of these two very valuable international insolvency initiatives. We appreciate everyone's interest in The International Scene.

Journal Date: 
Friday, December 1, 2000