INTRODUCTION TO CROSS- BORDER INSOLVENCY

Authors:

Ashwathi Menon, Dr. D.Y Patil College of Law

Sakshi Belwal, Assam University Silchar

Editor: Jasmine Emmanuel, GLC Thrissur



Introduction

Insolvency is a term that most of us are aware of. There are insolvency laws and cases that we often stumble upon. Insolvency if simply defined is a state wherein an individual or company can no longer meet their financial obligations to lenders as debts become due. Cross border insolvency is when these financial obligations run across borders. Cross-border insolvency is a term used to describe circumstances in which an insolvent debtor has assets and/or creditors in more than one country.

Cross-border insolvency denotes a situation where the insolvent debtor has assets in more than one jurisdiction or where some of the creditors of the debtor are not from the jurisdiction where the insolvency proceedings have been filed[1]. Professor Ian Fletcher, a renowned scholar on aspects of commercial insolvency, proposes that ‘cross-border insolvency’ should be considered as a situation‘…in which insolvency occurs in circumstances which in some way transcend the confines of a single legal system so that a single set of domestic insolvency law provisions cannot be immediately and exclusively applied without regard to the issues raised by the foreign elements of the case.’

Globally, with the growing competition in the international market of business and trade, creditors and corporate frequently transact business in more than one country. Cross-border trade has no longer remained the preserve only of large multi-national corporations, even small businesses have gathered around the courage to go beyond their jurisdiction and expand internationally. So in the current scenario, one can observe that usually when businesses become insolvent, it comes as no surprise that it involves cross- border transactions. The best example is the collapse of Lehman Brothers in September 2008, a firm that conducted business in over forty countries through the instrumentality of about 650 legal entities outside the United States.[2] The complexity and financial significance of cross border insolvency can be depicted well.

The consequence of such a situation is conflicting national laws between various countries and jurisdictional issues. Most of the counties lack a proper legal framework in regard to cross border insolvency and this has led to several unanswered questions.


Theories in relation to Cross border Insolvency

The cross border insolvency deals with three dimensions:

§ Firstly, protecting the rights of the foreign creditors who have certain rights on the assets of the debtor which are in the different jurisdiction wherein the proceedings of the insolvency is in place.

§ Secondly, when the assets of the debtors are in various jurisdictions and the creditor wants to involve those assets in a different jurisdiction in the proceedings of insolvency.

§ Thirdly, the insolvency proceedings are going on or commenced on the same debtor in more than one jurisdiction.

Theories of cross-border insolvency:

There are, broadly, three approaches to the administration of cross-border insolvency:


The territorial approach, whereby each country exercises its own domestic insolvency laws in relation to the entire debtor's property and all of the creditors located within its jurisdiction. This approach does not recognize 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:

A. 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).

B. Co-operative territorialism, which is broadly predicated on territorialist approach supplemented by multi-lateral conventions.

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 a hybrid approach.


Major Regimes in relation to Cross-Border insolvency laws

Since the early ages, there have been efforts to develop a framework on cross border insolvency. Initially, most of the countries used the territorialism theory to deal with the cases involving international insolvencies. With the increase in the cross border insolvency cases, it had become indispensable to formulate a legal framework to deal with cross border insolvency issues.

In 1980, the International Bar Association published a Model Law namely “Model International Insolvency Co-operation Act”, however same was not adopted by any country. With the passage of time, different laws of different jurisdictions dealing with insolvency and bankruptcy realised the need of support and cooperation to the insolvency practitioners of different jurisdictions in order to ensure effective administration of estates and assets of the company undergoing insolvency. The Istanbul Convention drafted agreements under the aegis of the European Committee on Legal Co-operation in relation to cross border insolvency laws and was opened for signature on June 5, 1990. It was adopted by the Council of Europe, an international organisation of nations having a larger strength than the EU, it provided for the vesting of primary jurisdiction in the courts of the state where the debtor’s main interests lay. However, the very structure of the convention was flawed and problematic, even after being an important milestone in the history of international regulation of cross border insolvency. It laid the foundation and framework for future conventions dealing with cross border insolvency and served as a vital catalyst in the development of the UNCITRAL Model Law.

The significant reforms happened on the subject with the development and adoption of the United Nation Commission on International Trade Law Model Law on Cross Border Insolvency in June 1997 and EC Regulation on Insolvency Proceedings 2000 which came into effect in May 2002.


The UNCITRAL Model Law

The UNCITRAL was created with a vision to harmonize and unify national laws related to international trade. In furtherance of this vision, the United Nations Commission on International Trade Law proposed the UNCITRAL Model Law on Cross Border Insolvency, 1997. The Model Law was adopted on May 30, 1997, by the UNCITRAL at its thirteenth session of UNCITRAL held in Vienna. States can implement the Model Law into their domestic regimes to assist in the coordination and resolution of complicated cross-border insolvency issues. As of today, 44 States have adopted the Model Law in varying degrees into their domestic legal systems.


Basic Principles of Model laws

The Model Law is divided into five chapters which cover general provisions; access of foreign representatives and creditors to courts in a state; recognition of foreign proceedings and relief; cooperation with foreign courts and foreign representatives; and lastly procedure to deal with concurrent proceedings[3].

The four main principles on which the Model Law is based on are as follows:

(i) Access: The Model Law allows foreign insolvency professionals and foreign creditors direct access to domestic courts and confers on them the ability to participate in and commence domestic insolvency proceedings against a debtor.

(ii) Recognition: The Model Law allows recognition of foreign proceedings and provision of remedies by domestic courts based on such recognition

(iii) Cooperation: The Model Law lays down the basic framework for cooperation between domestic and foreign courts, and domestic and foreign insolvency professionals.[4]

(iv) Coordination: The Model Law provides a framework for the commencement of domestic insolvency proceedings, when a foreign insolvency proceeding has already commenced or vice versa. It also provides for coordination of two or more concurrent insolvency proceedings in different countries by encouraging cooperation between courts

States have adopted the Model Law into their domestic legal systems after making variations they determine as suitable to their jurisdictions


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. 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 European regulation, the EC Insolvency Regulation does not seek to harmonize insolvency laws between the different member states. Rather, it facilitates the member States in determining the jurisdiction and applicable law for cross-border insolvency proceedings[5].

The scope of the EC Regulation is limited to “collective insolvency proceedings which entail the partial or total divestment of a debtor and the appointment of a liquidator”.[6]


Conclusion

Currently, the legal regime for cross- border insolvency is still in a very preliminary stage for most of the countries. In India, the Insolvency Law Committee has been submitting reports recommending the incorporation of Model laws of UNCITRAL but they are yet to be passed. Presently there is a lack of clarity with regards to cross border insolvency laws; there are also procedural challenges when dealing with such cases. The adoption of UNCITRAL model laws shall pave the way to eliminating such challenges.

[1] Halliday, T.C. and Carruthers, B.G., 2007. The recursivity of law: Global norm making and national lawmaking in the globalization of corporate insolvency regimes. American Journal of Sociology, 112(4), pp.1135-1202. https://doi.org/10.1086/507855 August 14, 2020 [2] Nishith desai http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research_Papers/Introduction-to-Cross-Border-Insolvency.pdf pp-10-25 August 14, 2020 [3] Nishith desai http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research_Papers/Introduction-to-Cross-Border-Insolvency.pdf pp-10-25 August 14, 2020 [4] https://www.uncitral.org/pdf/english/texts/insolven/V1188129-Judicial_Perspective_ebook-E.pdf August 14, 2020 [5] Nishith desai http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research_Papers/Introduction-to-Cross-Border-Insolvency.pdf pp-10-25 August 14, 2020 [6] Article 1(1), EC Regulation

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