6 Cross-Border Insolvency Issues

International Monetary Fund
Published Date:
August 1999
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The differences in national insolvency laws have important consequences in the case of enterprises with assets and liabilities in different countries. If a branch of an enterprise located in one country becomes insolvent, should creditors in that country be allowed to initiate insolvency proceedings while the enterprise as a whole is still solvent? If the enterprise as a whole is insolvent, should there be separate proceedings in the various countries where its branches are located? This approach is referred to as the “territorialist principle.” Alternatively, should there be a single procedure, based in the country where the head office or place of incorporation is situated? This approach is referred to as the “universalist principle.” Should there be a single liquidator or administrator, or one for each country where the enterprise has a place of business or assets? Should the liquidator or administrator appointed in one country be able to recapture assets fraudulently transferred by the debtor to another country? A review of national laws finds that countries take divergent positions on these issues.

From a practical standpoint, this diversity of approaches creates considerable uncertainty and undermines the effective application of national insolvency laws in an environment where cross-border activities are becoming a major component of the business of large enterprises. For this reason, a number of initiatives have been undertaken to improve recognition of foreign proceedings and cooperation in this area. For example, in November 1995 the text of the European Union Convention on Insolvency Procedures was adopted. This Convention sets forth rules for the treatment of insolvencies where the debtor has an establishment or assets in more than one state, including rules on choice of law, cooperation between courts, and the recognition of foreign judicial decisions and orders. The Convention has not been ratified by all members and its prospects for entry into force are still uncertain. In addition, the International Bar Association’s Insolvency and Creditor’s Rights Committee (known as Committee J) has developed the Cross-Border Insolvency Concordat, which is also designed to provide a framework for cooperation in multijurisdictional insolvencies.

A particularly important development in this area is the 1997 Model Law on Cross-Border Insolvency by the UN Commission on International Trade Law (UNCITRAL), negotiated among more than 40 countries representing a broad spectrum of differing legal systems. One of the distinguishing features of this model law is that it attempts to achieve limited but effective cooperation, compatible with all legal systems and, therefore, acceptable to all countries. Its goals are to ensure cooperation in cross-border insolvency cases through recognition of foreign decisions and access of foreign liquidators or administrators to local court proceedings. A Note on the Model Law, provided by the UNCITRAL Secretariat, comprises the Appendix to this report.

Principal Conclusions

In light of the growing importance of cross-border insolvencies, measures should be introduced to facilitate the recognition of foreign proceedings and the cooperation and coordination among courts and administrators of different countries. The adoption by countries of the Model Law on Cross-Border Insolvency prepared by UNCITRAL would provide an effective means of achieving these objectives.

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