Transnational Insolvency Proceedings

As the volume of international trade and the number of multinational corporations have grown, there has been a concomitant increase in transnational insolvency cases. When a company engaged in international business transactions becomes insolvent, commonly some kind of insolvency proceeding will be initiated in each country where the company does business. Different laws and different national interests can produce a challenging—if not difficult—situation for creditors of the insolvent enterprise. Where and how should the creditor go about protecting its interests? Should it seek to have its claim allowed in any one—or more—of the various proceedings? What rights will it be accorded in those proceedings, particularly the foreign forums?
Historically, two different approaches have been used to deal with transnational insolvencies. The first uses the principle of “territoriality” where each country takes control of the enterprise’s assets within that country and administers them according to the law of that country, giving little attention to what may be happening in other forums or to foreign interests. A second approach, often referred to as “universalism,” seeks a cooperative or coordinated approach to transnational insolvency. This might be achieved through the identification of a single forum or proceeding where all assets of a company would be administered and all claims and interests addressed.
Another variant of this approach is to identify a primary proceeding that has the lead in conjunction with a number of coordinated ancillary proceedings in other countries.
In an effort to encourage cooperation among countries and to try to harmonize the competing and conflicting schemes, the United Nations Commission on International Trade Law has adopted a Model Law on Cross-Border Insolvency. On a regional level, the European Union has adopted a “Convention on Insolvency Proceedings” to coordinate and harmonize such proceedings in EU countries. And the American Law Institute has a Transnational Insolvency Project to develop principles of cooperation in transnational insolvency cases among the members (United States, Canada, and Mexico) of the North American Free Trade Agreement (NAFTA).
The 2005 Bankruptcy Act creates a new chapter of the Bankruptcy Code to deal with cross-border cases. The new sections incorporate the Model Code of Cross-Border Insolvency. The new chapter expands the scope of U.S. bankruptcy law and provides an explicit statutory mechanism for dealing with cross-border insolvency and for the U.S. courts, trustees, and debtors to cooperate with their foreign counterparts. It provides a framework for common cross-border situations such as providing access for foreign creditors to domestic cases and for the coordination of simultaneous domestic and foreign proceedings for the same debtor so that the relief afforded in different jurisdictions is consistent.

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