A global solution to multinational default.

• Author: Westbrook, Jay Lawrence

TABLE OF CONTENTS

1. BACKGROUND 2278 II. UNIVERSALISM 2282 A. A Universalist Convention 2282 1. The Theoretical Background 2283 2. Convergence of Laws 2288 3. A Unified Law and Forum 2292 4. The Continuing Role of National Policies 2298 B. Interim Solutions 2299 III. AN APPRECIATION AND CRITIQUE OF OTHER VIEWS 2303 A. Professor Rasmussen 2303 1. Asset Control 2304 2. Disclosure 2305 3. Security as a Solution 2306 B. Professor LoPucki 2307 1. Generally 2307 2. Corporate Groups 2311 3. Lesser Universalism 2315 4. Transitional Rules 2329 C. Professor Guzman 2326 IV. CONCLUSION 2328 A new world is slouching toward New York and London, Beijing and Bangkok, to be born.(1) If our planet and our values survive the secondary effects of that emergence, we may look forward to a humanity more prosperous and more integrated than at any time in human history. The force that drives us to that future is free-market capitalism constrained in the vessel of democratic institutions. One important element in its progress is the fashioning of an international system for managing the financial crises that are one of the free market's inevitable consequences. In this symposium, we debate which is the best such system we can devise.

   The argument of this contribution to the symposium can be summarized as follows:

   1. Universalism -- administration of multinational insolvencies by a leading court applying a single bankruptcy law -- is necessarily the correct long-term solution. Bankruptcy is one of those laws that cannot perform its function unless it is symmetrical to the market in which it operates. Virtually all theorists share this view and it is reflected in the nearly unanimous practice of nations, including the United States. The only substantive objection is that universalism would too greatly submerge national policies, but experience in the United States and elsewhere demonstrates that a national, market-symmetrical law can largely accommodate local policies. In the same way, an international system could permit considerable play to varying national policies and could enforce them more effectively against multinationals.

   2. The primary objection to universalism is political. It is argued that universalism is unlikely to be achieved in the foreseeable future. Although political predictions are difficult, it is evident that globalization is producing enormous pressures for legal convergence and those pressures are most likely to prevail as to laws that require market-symmetry to be successful. Many of the obstacles to universalism are also obstacles to coordination and harmonization in antitrust, securities laws, and other business laws. Solutions in each area will feed solutions in the others if globalization continues.

   3. Contractualism as an alternative to universalism is not workable domestically or internationally unless it is based on a system of dominant security interests. The theoretical benefits of such a system remain highly controversial and its prospects for international adoption are bleak.

   4. The most difficult problem is fashioning an interim solution pending movement to true universalism. "Modified universalism," as proposed in the American Law Institute Transnational Insolvency Project, is the best answer because its pragmatic flexibility provides the best fit with the problem presented by the current patchwork of laws in the global market, and because it will foster the smoothest and fastest transition to true universalism.

1. BACKGROUND

   The symposium has arisen on a wave of bankruptcy reform that is sweeping around the world. The reform movement addresses both domestic and international bankruptcy laws, and is powerfully supported by initiatives from the International Monetary Fund(2) and the World Bank.(3) Legislatures in Bonn,(4) Buenos Aires,(5) Canberra,(6) Ottawa,(7) and Tokyo(8) have rewritten their bankruptcy laws in the last decade, as have Russia and China (twice each) and most of Eastern Europe.(9) New bankruptcy laws have also appeared in Singapore, Indonesia, and Thailand.(10) The wave has not crested. In addition to the promise of further reform in Tokyo, the British government has introduced a bill substantially revising the Insolvency Act of 1986,(11) the Mexican Congress has adopted a measure completely rewriting La Ley de Quiebras Y Suspension de Pagos,(12) and many other ministries are well along with reform measures.(13) These domestic reforms have included, in every instance, substantial examination of other countries' laws and reform proposals, so they rest upon an emerging international oeuvre of reform.(14)

   The domestic reform movements are matched by the burgeoning interest in transnational bankruptcy (or insolvency),(15) which we may define as the management of the general financial default of a multinational enterprise. The wave of reform at the international level demonstrates that the international community has a willingness and an ability to achieve reform in the field of multinational insolvency that is of obvious relevance to the present discussion. While the current reforms are only first steps, they go well beyond what most observers would have predicted just five years ago. In addition to the IMF and World Bank initiatives, the United Nations Commission on International Trade Laws ("UNCITRAL") has promulgated a Model Law on Cross-Border Insolvency (the "Model Law").(16) The Model Law does not adopt substantive bankruptcy rules, but rather, provides a system of cooperation among the courts having jurisdiction over aspects of the assets and affairs of a multinational enterprise in financial distress.(17) In many civil law countries, its adoption will provide an essential legislative direction permitting courts to cooperate with courts in other countries to manage multinational bankruptcies. In most adopting countries, it is likely to make cooperation in reorganization cases much easier, while frustrating efforts to engage in manipulation of assets and other fraudulent activity.(18) The Model Law has been fashioned into a new Chapter 15 of the United States Bankruptcy Code, and has been contained in every version of the pending bankruptcy legislation in both houses.(19) The basic principles of the Model Law are included in the new Japanese law(20) and its substance is part of the bankruptcy legislation adopted in Mexico.(21) The government bill in Britain provides for its adoption there.(22) It is under active consideration in a number of other countries, including New Zealand.(23)

   On a regional level, the countries of the European Union have negotiated a treaty providing for even closer coordination of transnational bankruptcies than the Model Law.(24) For a variety of reasons, it is now being adopted as a "regulation" and will be effective for all members except Denmark in May, 2002.(25) In North America, the initiative has come from the private sector in the form of the Transnational Insolvency Project of the American Law Institute.(26) Phase I of that Project produced international statements of the bankruptcy laws of the three NAFTA members.(27) Phase II of the project culminated in May, 2000, with approval of a statement of principles and legislative recommendations for closer cooperation in transnational bankruptcies among the NAFTA members.(28)

   Thus, the world is developing considerable experience and momentum in the field that we discuss in this symposium, and is beginning to demonstrate a capacity and willingness to find international solutions to the problems of general default. These movements have received relatively little attention in the academic literature until recently. I began writing and lecturing in support of universalist approaches in 1990. The ALI Project began in 1994. Professor Rasmussen's proposal for a contractual approach to international bankruptcy was published in 1997,(29) while Professor LoPucki's critique of universalism was published just last year.(30) Some important work has been done elsewhere in the last decade.(31) On the whole, however, the subject is just emerging in the academy.(32)

   Broadly speaking, there are three academic positions: universalism, territorialism, and contractualism. The traditional positions are the first two.(33) According to the traditional territorialist approach, each country would seize local assets and apply them for the benefit of local creditors, with little or no regard for foreign proceedings. By contrast, universalism is considered a system where one court administers the bankruptcy of a debtor on a worldwide basis with the help of the courts in each affected country. Contractualism is an extension to the international level of the contractual theories of bankruptcy advanced in recent years. All three positions are represented in this symposium.

   The discussion that follows is divided into two parts. Part I describes the ideal international system for managing the general default of a multinational enterprise.(34) It begins by distinguishing short-term transitional solutions from long-term theoretical ones. It then sketches the theoretical background for determining the proper scope of a bankruptcy law. It proceeds to describe the arguments for the proposition that "universalism" is the correct theoretical solution for the long term. Finally, it summarizes the argument that "modified universalism" is the better short-term solution. Part II responds to the positions taken in the prior articles by Professors Rasmussen and LoPucki, with some reference to their new articles in this symposium. It also comments upon Professor Guzman's article in this symposium.(35) In the process, it spells out the case for "modified universalism" as the best short-term transitional rule.(36)

2. UNIVERSALISM

   1. A Universalist Convention

      Only in the last decade has the subject of transnational insolvency evolved from an interesting rarity to a distinct and important category in international finance and transnational...