The globalization of business activity necessarily entails contacts with a diverse array of national laws and legal systems, and insolvencies in this context often have transnational consequences. In such situations, there is a clash of competing national laws on weighty questions including the recognition of security interests, processes related to the disbursal of assets, and different policy preferences underlying the protection of different kinds of creditors. These clashes pose difficulties because each country has framed its insolvency laws in response to particular political exigencies and the policy preferences of its citizens, reflecting different bargains between creditor and debtor protection. Despite its enormous financial importance and academic complexity, cross-border insolvency law remains in a state of confusion. This Article analyzes the recognition and enforcement of cross-border insolvency judgments from the United States, United Kingdom, and Australia to determine whether the UNCITRAL Model Law's goal of modified universalism is currently being practiced, and subjects the Model Law to analysis through the lens of international relations theories to elaborate a way forward. We posit that courts could use the express language of the Model Law text to confer recognition and enforcement of foreign insolvency judgments. The adoption of our proposal will reduce costs, maximize recovery for creditors, and ensure predictability for all parties.
TABLE OF CONTENTS I. INTRODUCTION II. CROSS-BORDER INSOLVENCY LAW IN AUSTRALIA A. Bankruptcy Laws B. Corporations and Insolvency 1. Model Law C. Judicial Interpretation of the Model Law 1. Ackers v. Saad Investments Company Ltd 2. Yu v. STX Pan Ocean Co Ltd 3. Moore, as Debtor-in-Possession of Australian Equity Investors v. Australian Equity Investors III. CROSS-BORDER INSOLVENCY LAW IN THE UNITED STATES A. Judicial Interpretation of the Model Law 1. In re Betcorp Ltd 2. ABC Learning Centres 3. In Re Metcalfe 4. In re Qimonda 5. In re Vitro IV. RECOGNITION AND ENFORCEMENT IN THE UNITED KINGDOM A. Judicial Interpretation 1. Cambridge Gas 2. In re HIH 3. Rubin and New Cap Re V. HARMONIZED FRAMEWORK FOR RECOGNITION AND ENFORCEMENT A. The Model Law is Insufficient B. Universalism is the Solution C. Harmonization of Cross-Border Insolvency Law: Why a Model Law? D. The Role of the Courts VI. CONCLUSION I. INTRODUCTION
The globalization of business activity necessarily entails contacts with a diverse array of national laws and legal systems. It is no accident then that when multinational businesses become insolvent, such insolvencies often have transnational consequences and cross the boundaries of domestic jurisdictions. (1) A recent illustration of the scale, complexity, and financial significance of the issues involved is provided by the insolvency of Lehman Brothers, a firm that conducted business in over forty countries through the instrumentality of about 650 legal entities outside the United States. (2) In such situations, there is a clash of competing national laws on questions including the recognition of security interests, processes related to the disbursal of assets, and different policy preferences underlying the protection of different kinds of creditors.
These clashes pose difficulties because each country has framed its insolvency laws in response to particular political exigencies and the policy preferences of its citizens, reflecting different bargains between creditor and debtor protection. Alongside this variety of legal rules is the competition among creditors to maximize their private benefit to the exclusion of others. The result has been summed up by one author as triggering "diverse and uncoordinated legal proceedings in various countries connected to the affairs of [a multinational] enterprise." (3) Inevitably, as private actors compete to secure their interests via a multiplicity of proceedings across the world, costs rise. (4) In this milieu, it is clear that the primary beneficiaries are the debtor, and some creditors who possess deep pockets, because small creditors may not be able to afford the costs of participating in multiple proceedings in different jurisdictions. In sum, the problems thrown up by cross-border insolvency include (1) lack of clarity as to applicable laws, (2) uncertainty about participation in proceedings in foreign courts, (3) language, (4) ensuring procedural fairness, (5) equal treatment of creditors, (6) uncertainty about the validity and enforceability of security, (7) protecting the interests of employees and other vulnerable groups, (5) (8) increased borrowing costs owing to uncertainty faced by creditors, (6) (9) delays in disbursement of assets, and (10) difficulty in protecting a diverse array of national public policy goals.
Clearly, for many practitioners and scholars, the solution to these problems would be to subject the insolvency to one proceeding with global reach to cover all assets worldwide and with the responsibility for disbursing assets to claimants. This view--universalism--is one pillar of the tripod that divides academic opinion about cross-border insolvency law. (7) The alternative approach to cross-border insolvency is where each country applies its own laws within its own jurisdiction to the assets of the insolvent debtor and distributes the proceeds to local creditors. This is referred to as territorialism, 8 a system characterized by a multiplicity of proceedings and resulting inefficiencies.9 Currently, insolvency law has not been subjected to a global mandatory harmonization process, and there is no international law to limit diverse and uncoordinated proceedings. Instead, the international legal landscape is characterized by a patchwork of national laws that seek to accommodate cross-border insolvencies, often owing their provenance to a different commercial age. For instance, until recently, Australia's laws in relation to cross-border insolvency derived from the bankruptcy laws developed in the United Kingdom in the nineteenth century. (10)
During the twentieth century, a number of countries developed bilateral and multilateral agreements to govern the processes involved in cross-border insolvencies between them. (11) Although these agreements work between individual nation states that are party to those agreements, they are necessarily limited in their application. While these regional initiatives were being developed, other world bodies were developing protocols to provide a better framework for global insolvencies. (12) More recently, academics, judges, and practitioners have sought to develop a harmoized that would govern cross-border insolvencies on a global basis as a potential cure for this lack of consistency in approach and application. These efforts reached their apogee when on May 30, 1997, the United Nations Commission on International Trade Law (UNCITRAL) adopted its Model Law on Cross-Border Insolvency (Model Law). (13) The Model Law subscribes partially to the universalist approach to cross-border insolvency. Among other things, it
* sets out the conditions under which persons administering a foreign insolvency proceeding have access to local courts;
* sets out the conditions for recognition of a foreign insolvency proceeding and for granting relief to the representatives of such a proceeding;
* permits foreign creditors to participate in local insolvency proceedings;
* permits courts and insolvency practitioners from different countries to cooperate more effectively; and
* makes provision for coordination of insolvency proceedings that are taking place concurrently in different States. (14)
A number of developed countries (including the United States, Canada, Britain, Japan, and Australia) have adopted the Model Law, and it has become the law that governs cross-border insolvency in some of the world's most economically powerful nations. It was the aim of its drafters that most countries in the world would adopt it as law, paving the way for incremental harmonization of the law in this area. (15) However, an inherent flaw in the model law approach is that the longer it takes to achieve adoption on a global level, the more open it is to the generation of uncertainty derived from inconsistent application and interpretation.
Moreover, until September 10, 2015, only twenty-two countries in total had adopted the law in the seventeen years since it was developed. (16) Very few developing countries (17) had adopted it. However, on September 10, 2015, seventeen African countries, member states of OHADA (the Organisation pour l'Harmonisation en Afrique du Droit des Affaires) adopted the Model Law. (18) Before that, the last three countries to adopt the Model Law were Seychelles, Vanuatu, and Chile in 2013. (19) The Model Law represents the third pillar--modified universalism--under which a diversity of national laws is allowed to exist with an emphasis on cooperation. (20) Modified universalism has the virtue of flexibility and acknowledges deeply held divisions between nation states about the applicability of their policy preferences to assets located within their jurisdiction. (21) The approach has been criticized for not providing sufficient certainty, failing to reduce transaction costs, being inefficient, and for possessing all of the vices of territorialism. (22)
The various avenues available to resolve cross-border insolvencies have been supplemented more recently with less formal processes based on contracts between creditors and debtors. Those processes include cross-border insolvency agreements in which the parties cooperate and coordinate insolvency proceedings in multiple jurisdictions, usually by way of agreed protocols. (23) Other scholars have proposed that the most efficient means of governing cross-border insolvencies can be achieved through the use of contract ex ante, allowing creditors and debtors to agree beforehand on the...