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Week 1Insolvency law favors the collective interest of creditors at the expense of individual creditors rights,
this has unanimous acceptance by nations as applied to insolvencies contained within their borders.
1 In the international context, this support for collective compromise is abandoned, they are not
willing to subjugate the interests of the local creditors to a broader compromise with foreign
creditors. There is a beggar-thy-neighbor-policy involving making your own country richer by making
the other ones poorer.
The competing interests in this matter are local protection and international cooperation.
2
An approach of international insolvency is territorialism, meaning that the jurisdictions are viewed as
being within the exclusive province of the court and laws of that jurisdiction. The insolvency is not
seen as a whole, but as a constellation of sets of assets and claims grouped and divided by national
borders.
In the Roman Empire the law applied to such an extremely broad territory and in the Middle Ages it
3 was all local. Recently it became a problem due to globalization.
The strained process of territorial insolvency administration: Under the territorial view insolvency has
to be initiated with the territorial authorities of the place where the assets are located and those
should be administered exclusively by local courts according to local procedures. Whether the
foreign creditors who have local physical and financial resources will be included depends on the
intenseness of the territorialism.
Asset value is done simply by reason of the physical or constructive location of assets at the moment
of the insolvency filing.
When more than one insolvency case is initiated in different states, each case proceeds in parallel
4 with no regard for the proceedings in other states and all wanting to seize as much asset value as
possible. The guiding tenet is the grab rule. Even when greater value can be achieved by selling or
using assets in synergistic units, the territorialism prevents this compromise.
All is being made worse since the states are looking for other assets outside their territory, but not
for creditors. However, those assets are hard to get exerted since there is no cooperation from the
state. Therefore, most of the times the only way is by indirect leverage, such as the threat of
redistribution of its own assets. This will only work when it has other assets within its jurisdictional
reach and is such action violate the dictates of such courts.
This has the potential to expose creditors to competing commands from different national courts,
they are caught in the crossfire between battling national insolvency courts and the hostage value of
the assets in each state, even including employees.
The territorial approach is mostly based on sovereignty, the power to say what the law is and to
5 exercise power to dominate a territory and assets located on it. It promotes at least three principles:
1. The democratic accountability: power to the national level keeps the scope of influence within
manageable limits to preserve responsiveness and democratic accountability
2. The democratic legitimacy: with political compromises, losers are likely to view the results as
legitimate only if their voices could be heard, this will be harder when the policy perspective
expands
3. The preservation of distinctive cultural identities and creative competition among multiple
sovereign rule systems: it avoids sacrificing unique and valuable cultural preferences
Regarding the first point, accountability is a problem in international insolvency proceedings, every
6 case will include claimants who are foreign, and nothing is done to address the accountability of
these concerns. Which means the territorial approach does not solve this.
, Concerning the democratic legitimacy, territorialism undermines the purpose of insolvency
7 administration and the legitimacy of any given result in the eyes of the collective demos, since it pits
local interest against foreign interest, and the foreign ‘losers’ will rightly view this result as
illegitimate.
8 The preservation is also not achieved since insolvency is inconsistent with maintaining individual
preferences, since it is about the greater good.
Sovereignty is too weak and too strong for an effective principle: too weak because no nation has
enough power, and too strong because it ignores the limitation on the effectiveness and overstates
its own power to force national solutions on international problems.
The essence of insolvency law is undermined with territorialism, since insolvency law overcomes
9 divisions among creditors, and sovereignty reverses course and reestablishes divisions based on
territorial location. The goal of insolvency law is to form a pool of assets, and this is not possible with
territorialism.
Universalism is a unified procedure coordinated by one central authority, which is a universally
10 acknowledged necessity domestically. It applies in international cases; it binds the entirety of the
interests involved. In other words: it is symmetrical with the market.
The purest form would mean that there is one worldwide court that applies one set of insolvency law
to all international insolvency cases.
A compromise approach between both is modified universalism.
11
Choices in the universalist system are the choice of forum and insolvency law, there can be multiple
options.
Arguments for the hypothetical superiority of universalism:
- Predictability and prevention of forum shopping: predictability is hard to come by in an
inherently chaotic system. On the other hand, one set of rules will increase the predictability, and
this will make credit cheaper. The important matter on this point is whether a jurisdiction could
be chosen that is less manipulee and more consistent than assets location, and if this will
succeed with cooperative but legally distinct members of corporate groups. Choosing the COMI is
the best option, but still manipulee.
14 The universalist approach is to overcome artificial barriers, such as dividing enterprises into
distinct corporate entities.
Furthermore, the universalism gives more predictability since it is sure that the rights will not be
undermined when it is in another country.
- Upholding legitimate expectations: with the territorialism, the expectations of the small and
15 local creditors are protected, while the bigger international ones are not. This leads to a vary of
problem: it overstates the existence and value of the relevant parties’ expectations, it
jeopardizes the very interest it seeks to protect, and it focuses on the wrong interests to be
advanced in general.
Unsecured creditors have no meaningful expectations when there is a multinational company,
even with a territorialism approach, they mostly do not get their money. It is the risk of dealing
with such a company.
The fairest way to protect all creditors, including the unsecured ones, is to ensure that their
17 recovery in every insolvency case is based on a collective evaluation of all claims and assets in the
case.
Territorialism might even harm local creditors because the large creditors can be local to many
18 different territories and even when not, they are more likely to have the means to participate in
an insolvency case.
- Minimizing losses and transaction costs, maximizing value: the gains that all local creditors have
21
19
through cooperation in foreign insolvency will equal or exceed the losses suffered by some local
, creditors who now do not have exclusive interest in some assets. The increase in cooperation will
also lead to a transactional gain, reasons here for are:
o Main court saves transaction costs, because there are not separate parallel cases
o The coordinated, unified administration of all the assets will facilitate the maximization
of value. While territorialism destroys value by dismembering the enterprise.
o Macro gains outweigh the micro losses
Even though universalism gives all these advantages, the countries will stick to the territorialism. This
is because of the historical inertia. Also, states are unlikely to go for foreign insolvency law, when it
differs too much from national laws.
However, there is a movement towards modified universalism, which is adopted in the EU.
There are various alternatives of the universalism approach. Those who strengthen it are:
22
- Multilateralist, this is a regime where there is a choice-of-law with the proceeding being based in
the jurisdiction closely linked. However, there is no predictability and it is problematic when the
debtor is not one judicial person, but a company within a corporate group. The jurisdiction that
should be chosen is also quite vague.
- Kolmann: the creditors should be able to open secondary proceedings, but when doing so the
scope of the second one should be determined by the lex concursus of the main proceeding.
An alternative of territorialism is the cooperative territorialism. This states that all state has
24 jurisdiction over the assets that are located in it, but there should be cooperation between the
states. Objections are that (1) it is possible that an asset does not belong to the estate of the
insolvency proceeding opened in another country and the debtor can then transfer it to somewhere
hard to find, and (2) that those assets are susceptible to attachment by creditors. Cooperation also
never really occurs.
There is also an alternative which mixes territorialism and universalism, by Von Wilmosky. The asset
25 deployment should be determined by the lex concursus of the state where the proceedings are
opened, while the matters of distribution (including ranking), should be determined by the law of the
group of persons for whose benefit the insolvency law intervenes. The asset deployment should be
chosen by the debtor.
The contracturualism approach suggests that every company can choose the insolvency law to be
26 applied at the start of the company’s legal life. The choice of law and forum should lead to the same
jurisdiction. The other states should respect the choice, but do not have to render assistance when
this leads to consequences contrary to domestic public policy. This view encourages companies to
select the country with the most efficient laws. Advantages are more certainty and because of the ex-
ante approach no forum shopping. Franken is a proponent of contractualism, because it would
combine the advantage of ex post value maximization with ex ante predictability. Eidenmuller
discusses four models of free choice. Critics state that it is not appropriate for natural persons; not
open for those who lack the means to object to a contractual choice; it excludes some parties who
would otherwise be protected; the choice will be based on their own interests; disadvantages for
secured interests; inadequate information; and does not preclude states from choosing a model that
allows for the opening of territorial proceedings. Last disadvantage is that countries will compete in
their legislation, which will lead to a race to the bottom.
29 The versions that fall between universalism and territorialism are called modified universalism.
Some examples are given in the text.
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