Workshop on Bankruptcy

May 17–19, 2001
St. Louis, Missouri

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Jay L. Westbrook and Susan Block-Lieb

With the adoption of the new chapter 15 of the Bankruptcy Code (“Ancillary and Other Cross-Border Cases”), ¹ international and comparative insolvency law are subjects that have come of age. Both of us teach these subjects. One of us (Jay), includes transnational bankruptcies as a chapter in his casebook on bankruptcy law² and usually covers the subject in the basic bankruptcy course. The other one (Susan), teaches a seminar called “international insolvency law.”

Our objective in this session is to give a quick overview of the area and to make a few concrete suggestions for integrating this material into existing courses and for developing a seminar or mini-seminar that peers past the water’s edge. International insolvency,³ in the sense of general default by a multinational corporation,⁴ is generally taught as a separate section of a course or as a seminar, while comparative insolvency law can be woven throughout either a basic or an advanced course. In the website provided to the workshop by the AALS (http://www.aals.org/profdev/bankruptcy/prog.html), we provide a) a hyperlink to the web-based course materials Susan uses in her IIL seminar;⁵ b) the transnational chapter in the forthcoming edition of the casebook written by Jay and Liz, along with the Teacher’s Manual; and c) a problem Jay taught in a restructuring class at Harvard this spring. At the session, Susan will go through her web site to provide an idea of how it can be used in this sort of a course, so that those of you interested in using the internet to reach your students may have an interest in this workshop that extends beyond the substance of international insolvency law.

Ten years ago, when Jay first taught a course on international insolvency law at the University of London and then at Harvard, it would have been viewed by most academic deans as an indulgence to the whims of the instructor. Students might also have questioned the practical implications of such a course. Indeed, ten years ago a course on international insolvency law was dominated by academic questions about the need for international insolvency law. There was relatively little to cover in the way of hard law.

All that has changed. As a result of globalization, we see not only more multinational corporations but also more domestic business entities with multinational trading partners. High-profile international insolvency proceedings, such as the Daewoo cases, pending in the US and Korea, and the Singer case, whose 152-country sewing-machine reorganization was triggered by an unauthorized bankruptcy filing by its German subsidiary(!), remind us that when things go awry for firms involved in this global economy their insolvencies have international implications.

International Insolvency Law. Even a brief introduction to a transnational bankruptcy case is exciting for students and intellectually liberating. Although the subject is usually addressed in a separate class or classes, it can be introduced by specific cases or problems. The Maxwell case, for example (found in both our syllabi), can be used as the climax of a preference segment in the regular course, putting a whole new face on the material. (That use is also a good example of the distinct benefit of a comparative, as well as an international, perspective-see below.)

What international insolvency law is there? There are at least three sources of international law that may govern the coordination of insolvency proceedings with multinational implications. First, the United Nations Commission on International Trade Law (UNCITRAL) has promulgated its Model Law on Cross-Border Insolvencies.⁶ Although approved by the general assembly of the United Nations in 1997, this Model Law is not self-effectuating. Unlike a treaty or convention, a model law is offered for adoption by each country in the hope that its adoption by a number of countries will begin the process of cooperation and, eventually, harmonization. Since that time, several countries (Eritrea, Japan, Mexico, South Africa, the United Kingdom, and the US) have enacted or authorized legislation to implement the substance of the UNCITRAL Model Law on Cross-Border Insolvencies into their domestic insolvency law. The US would implement the Model Law through the new chapter 15 of the Bankruptcy Code.⁷

Second, effective May 2002, the European Union has adopted its own Regulation on Insolvency Proceedings.⁸ Although the EU Reg only governs the coordination of insolvency proceedings within the Union, its underlying principles and approaches have been extremely influential in the international community.

Third, between 1997 and 2000, the American Law Institute approved the four volumes that comprise its transnational insolvency project.⁹ The ALI seeks to encourage cooperation in the administration of bankruptcy cases involving more than one of the three NAFTA trading partners - the United States, Canada and Mexico - beyond that envisioned under UNCITRAL’s Model Law. Phase I of the ALI project reports comprehensively on the domestic insolvency law of the US, Canada, and Mexico. Phase II identifies principles of cooperation in transnational bankruptcy cases among the members of NAFTA, including recommendations for legislation or international agreement. Revisions are being completed prior to publication that will reflect the new Mexican bankruptcy law.¹⁰

In the absence of international law to coordinate insolvency proceedings with transborder implications, multinational insolvency issues are addressed on a territorial basis (one nation at a time). Territoriality is problematic in that territorial application of insolvency laws may preclude the reorganization of a multinational business. Even if only liquidation is sought, uncoordinated multiple insolvency proceedings are more costly to administer than coordinated proceedings. (Just imagine if, in the US, bankruptcy law were state law. A firm doing business nationwide would be required to file in every state in which it does business or otherwise holds assets.) In the absence of international law on the topic, however, coordination can only occur when one country's courts unilaterally decide to defer to the jurisdiction of another country's courts. Although common law courts have developed the doctrine of comity to permit this sort of deference, application of principles of comity is difficult if not impossible to predict ex ante. This unpredictability may affect the cost of credit available to multinational business entities and the cost of contracting with foreign creditors. A “universalist” insolvency law system would not suffer from these shortcomings.¹¹ Although “modified universalism” is the core of the project approved by the ALI, academics debate the wisdom of a “modified universalist” approach in the short term. A recent Michigan Law Review colloquy elaborates.¹²

It must be emphasized that the UNCITRAL Model Law on Cross-Border Insolvencies, EU Reg, and ALI Transnational Project represent only modest first steps, important as they may be. They look only to coordinate the administration of transnational insolvency proceedings. They do not attempt to harmonize insolvency law around the world, within Europe, or among the NAFTA trading partners. However, efforts at harmonization have begun as well, which takes us to our second subject - comparative insolvency law.

Comparative Insolvency Law. It is not necessary to teach an international law segment or course to give students (and teachers) some of the enormous intellectual benefits of comparative law study. At any point in the basic bankruptcy course, a glance at other systems can transform appreciation of the strengths and weaknesses of the US approach and reveal the underlying conceptual and practical issues implicated. It also exposes the intimate connections between the structure of insolvency law and the underlying culture and values of each society. For example, fraudulent conveyance law is pervasive throughout the world (generally under the rubric of “Paulian action”), but with enormous variations in the relevance of the mens re of both transferor and transferee. This comparative observation can open up a new level of class discussion. To tell a US class that in much of the world (including, e.g., England, Mexico, and France) a security interest is trumped by other claims (e.g., taxes and wages) is to reveal that Article 9 was not written by God and that other societies might take distinct views of various priorities, including even security interests. Then again, much spirited discussion arises by asking a Canadian student (with a grin) why Canadians denounce the debtor-in- possession even though they have one too. We have already mentioned using Maxwell to open up policy questions underlying preference law. And so on.¹³

We also try to include a comparative law component in the study of international insolvency law. With this comparative look, we ask our students to consider the variations and commonalities that exist among the world's insolvency laws. It would be impossible to offer a comprehensive comparative study of insolvency law, so we attempt only a broad survey. This comparative approach, even one painted with a broad brush, permits us to make several basic points about international insolvency law.

First, we note the variety of existing insolvency laws to explain the modest goals that international law has sought to achieve in this area in the short term.

Second, a comparative look at insolvency law helps us to highlight the difference between choice of forum and choice of law and the interaction between them. As purely territorial approaches to insolvency law are modified to adopt aspects of universalism, choice of forum becomes an important concept. In a universalist insolvency system, the liquidation or reorganization of a business entity would be accomplished by a court in the country of the debtor’s “center of main interests;” the decisions of this court would bind creditors and other interested parties, wherever located.¹⁴ But the forum country of the debtor’s “center of main interests” may not always apply its own law. While the law of the country of the “main proceeding” (EU Reg and Model Law terminology) will govern many important issues that arise in the administration of that case (the “lex concursus”), the law of some other country may govern important topics such as whether a security interest granted by the debtor is enforceable against third parties or whether a pre-bankruptcy transfer by the debtor is subject to avoidance.

There is a wave of insolvency-law reform sweeping around the world. Ongoing efforts by the International Monetary Fund,¹⁵ Asian Development Bank,¹⁶ World Bank¹⁷ and UNCITRAL¹⁸ to identify the qualities of an orderly and effective system of domestic insolvency law provide examples of lawmaking built on a comparative study of various insolvency law regimes.

Comparative and international insolvency law have never been richer or more dynamic subjects. We look forward to talking to you in St. Louis about including them in your bankruptcy curriculum.