Corporate Group Cross-border Insolvencies Between the United States & European Union: Legal & Economic Developments

• Publication year: 2013

Corporate Group Cross-Border Insolvencies between the United States & European Union: Legal & Economic Developments

Nora Wouters

Alla Raykin

CORPORATE GROUP CROSS-BORDER INSOLVENCIES BETWEEN THE UNITED STATES & EUROPEAN UNION: LEGAL & ECONOMIC DEVELOPMENTS

Nora Wouters^* Alla Raykin^**

Introduction

As corporations become increasingly globalized, cross-border insolvencies are more prevalent. Insolvency raises the problems of any cross-border dispute: reciprocity, venue, choice of law, and cultural differences. However, unlike a typical adversarial dispute, successful insolvency proceedings do not have a single "winner," and therefore raise unique problems. Insolvency's goal of maximum private and public economic benefit is best achieved through cooperation, efficiency, and overall asset maximization.

Disparate parties each fighting for their best private outcome would contravene a harmonious proceeding to achieve this goal. However, the absence of a universal insolvency law makes achieving harmony through cooperation across borders especially difficult. Each country has its own laws and procedures, and each citizen creditor has expectations based on their respective sovereign's laws. Differences in these laws range from specific (such as priorities and dischargeable claims) to the overarching goals (such as creditor returns or job preservation).¹

Navigating these competing laws is a significant problem for corporate groups, or companies with many different entities comprising a larger entity. corporate groups often have branches or separate legal entities in different countries and are therefore common in cross-border insolvencies. A successful corporate group insolvency would accomplish several key goals: (1) maximization of enterprise-wide value, (2) clarity and predictability in

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applying the law, (3) treating similarly situated creditors equally, (4) procedural fairness, (5) protection of employment, and (6) respecting the separate legal status of entities.²

The ideal way to achieve these goals would be through a single, centralized insolvency proceeding, but choosing the appropriate venue (COMI) for this is problematic. This centralized proceeding would provide oversight to ensure that these goals are pursued most effectively. A single proceeding would minimize costs, expedite the proceedings, provide a single forum for comparison of relevant options, discourage individual parties-in-interest from taking action beneficial to them but suboptimal for the entire corporate group, and ensure cooperation among all the parties. However, single proceedings face three impediments to implementation: (1) adhering to creditors' rights and expectations under their country's laws, so as to not discourage cross-border lending; (2) inducing creditors of diverse and conflicting interests to cooperate for collective asset maximization; and (3) respecting national sovereignty.

In the U.S., corporate groups can have a single consolidated proceeding,³ but there is no such mechanism for E.U. corporate groups. The European Insolvency Regulation ("EIR"), which dictates how its signees treat intra-E.U. insolvencies, does not explicitly address corporate groups. While a single, efficient proceeding is possible under the EIR, it is not legally prescribed. The difficulty of achieving a single efficient proceeding is exacerbated when a cross-border E.U.-U.S firm must coordinate proceedings under the EIR and the U.S. Bankruptcy Code (the "U.S. Code"). Unlike the U.S., the E.U. has no continent-wide system of courts. Moreover, the EIR grants its member states far more autonomy to apply local law than the U.S. Code grants its states.

Reorganizations of corporate groups, treated as a single entity, have a greater chance at success than those treated as separate entities. A single proceeding affords economic efficiencies, lower administrative costs, and centralized control of restructuring. A standardized policy to guide cross-border group insolvencies would provide predictability to creditors, increase the chances of successful restructuring, achieve maximization of the sale of assets on an integrated level, and provide guidance to complete insolvencies. Ultimately, such a policy would provide a workable solution to the inherent tension between respecting the bounds of legally separate entities, while

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achieving asset maximization at the corporate group level. Leaving creditors no worse off than in liquidation would be the guiding baseline for such a solution.

In the absence of a single binding procedure, there are several means by which private parties can ensure efficient proceedings. This Article addresses the issues a practitioner will face in an E.U.-U.S. cross-border insolvency. Part I discusses the current state of international insolvency law: the United Nations Model Law, the European Union's EIR, and the U.S.'s chapter 15. Part II addresses corporate groups—what they are, their benefits, and the challenges they face in insolvency. Determining a center of main interests ("COMI") is frequently the greatest challenge. Part III then discusses the costs of a corporate group proceeding and how to maximize the proceedings' efficiency. This Part also highlights case examples of corporate groups that achieved efficient proceedings and those that did not. Finally, Part IV provides guidelines for private parties to use protocols to coordinate efficient proceedings and how administrators can ensure efficiency.

I. Existent Cross-Border Insolvency Law

This Part will discuss the philosophical debate that has emerged around cross-border insolvencies. There are two dominant philosophies to cross-border insolvency: universalism, which calls for a single proceeding and harmonized insolvency law; and territoriality, which advocates separate proceedings, with separate laws for each country in which the debtor has assets. In practice, a hybrid "modified universalism" prevails. Part I.B. explains how these philosophies have shaped the existent law. The United Nations Commission on International Trade Law's ("UNCITRAL") Model Law espouses modified universalism. Part I.C. describes the U.S.'s version of the model law: chapter 15. While several European nations have also adopted versions of the model law, insolvencies between E.U. member states is governed by the European Insolvency Regulation (EIR), discussed in Part I.D.

A. Philosophical Underpinnings

The two diametrically opposed approaches to cross-border insolvencies are universalism and territorialism.⁴ Most international insolvency law operates

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under the hybrid modified universalism, which aspires towards universalism, but maintains elements of territorialism.

Universalism propounds a single unified law to govern bankruptcy proceedings.⁵ This would be a regime similar to the U.S. Code—federal law that controls in all U.S. states. Under universalism, all proceedings would take place in a centralized court and proceedings would be subject to a single law (with minor concessions to state law).⁶ Territorialism imposes no single law but relies on each jurisdiction to apply its own laws. It subjects a multinational debtor to parallel proceedings in each country in which its assets are located, but each country's court's jurisdiction does not extend beyond the country's borders.⁷ Territorialism proponents argue that a formal universalist law infringes upon national sovereignty, and private parties can enter into private agreements, or protocols,⁸ to achieve efficiency without imposing a universal law on sovereign states.⁹ Absent a universal policy, the chances of parallel proceedings increase; multiple hearings add the costs of court-to-court coordination and the risks of local jurisdictions creating self-protective law or bias jurists.¹⁰ Intuitively, fewer competing proceedings are more efficient. Nonetheless, universalism's ideal of a single proceeding is difficult to implement: countries and their citizen creditors are hesitant to cede their sovereignty.

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The existent practice of cross-border insolvency is neither of these absolutes, but is a "modified universalism."¹¹ Modified universalism embraces the economic efficiency of single proceedings without a single universal bankruptcy law.¹² It strikes a compromise between the two by allowing secondary proceedings¹³ and emphasizes cross-border cooperation, with cooperating countries maintaining their own laws.¹⁴

B. The Model Law

UNCITRAL's Model Law on Insolvency¹⁵ has influenced cross-border cooperation and created a uniform adoption of modified universalism.¹⁶ Under the Model Law, adopting countries decide their own substantive law, but must allow foreign representatives "equal, simple, and fast access" to their law.¹⁷ The Model Law provides a tool for "authorizing and encouraging cooperation and coordination between jurisdictions."¹⁸ Its four key elements are access, recognition, relief (assistance), and cooperation.¹⁹

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Comity is integral to the Model Law.²⁰ Under the Model Law, the principle of comity has evolved into "recognition."²¹ Once a court recognizes a foreign main proceeding, the recognizing court should use its equitable discretion to fashion post-recognition relief, equivalent to what that foreign court would anticipate under its own laws.²² According to one study, out of 195 cases, recognition was granted in 95% of all cases under the Model Law.²³

C. U.S. Law: Chapter 15²⁴

In 2005, the U.S. adopted the Model Law in chapter 15. Its encourages cooperation for transnational cases and provides for fair and efficient administration of cases.²⁵ Like the Model Law, it prescribes recognition of foreign proceedings but limits recognition if actions would violate the recognizing country's public policy.

Chapter 15 was an extension of former 11 U.S.C. § 304,²⁶ which permitted foreign representatives to appear in U.S. court without submitting to that court's jurisdiction.²⁷ U.S. courts have...