Vol 9 (2012) - Issue 4

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Existing Theories of Cross-Border Insolvency: Observations From the US Chapter 15 Experience

In 2005, the US Congress adopted the United Nations Commission on International Trade Law Model Law on Cross-Border Insolvency (the 'Model Law') by enacting Chapter 15 of the Bankruptcy Code.1 The Model Law emerged from the recognition that the traditional methods of dealing with cross-border insolvency did not adequately address the needs of parties and courts when faced with the difficulties of rescuing or liquidating an entity operating simultaneously in two or more countries. At the time, universalism and territorialism provided the dominant theoretical approaches to cross-border insolvency cases. Universalism in its pure form envisions a single primary court administering the insolvency case of a multinational debtor, with the insolvency law of that jurisdiction governing the case and extending to all the debtor’s assets, wherever located. Territorialism, in contrast, dictates that local insolvency laws apply to insolvency proceedings commenced in each place where the multinational debtor can satisfy the local filing requirements, and that such laws reach only the assets and interests within that locality’s jurisdiction. Academics generally agree that the Model Law, and Chapter 15 of the Bankruptcy Code, embody a form of ‘modified universalism’ – an approach that embraces the unifying principles and objectives of universalism, but retains territorialist aspects designed to protect the interests of domestic creditors and other local stakeholders.
In this article, we summarise certain key Chapter 15 filing statistics, and discuss some recent Chapter 15 issues that courts have tackled. Our informal survey of Chapter 15 petitions filed in the US suggests that US bankruptcy courts are now quite comfortable with Chapter 15’s fundamental universalist objectives, such as staying US proceedings in favour of a foreign insolvency proceeding or turning US assets over to a foreign administrator for distribution in a foreign proceeding. US bankruptcy courts, however, continue to explore the reach of Chapter 15’s universalist ideals in those areas that arguably stretch them the furthest, for example, in the application of foreign avoidance laws in the US or the treatment of corporate groups as consolidated enterprises. Thus, we conclude that while Chapter 15 provides an effective tool for managing cross-border insolvencies, some of the tensions identified in the theoretical debates between the universal and territorial approaches remain.

I. Chapter 15: what US filings reveal
Between the time Chapter 15 was enacted in 2005 and 1 May 2012, over 640 Chapter 15 petitions were filed in bankruptcy courts throughout the US.