By Vishakha Bhandakkar
In this day and age, the world has become more interconnected, giving rise to what is called the global economy. In such an economy, corporate insolvency has become a key consideration for businesses, stakeholders and governments across the world. This article attempts to provide an overview of the composite relationship between corporate insolvency laws and the challenges posed by a globalized economy. Global economic integration has led to a metamorphosis of corporate insolvency as businesses have become multinational. This requires harmonization of corporate insolvency laws to address the challenges and peculiarities of international insolvency. The purpose of this article is to throw light on the adaptations and solutions associated with international insolvency issues. The article examines the impact of a globalized economy on corporate insolvency. Multinational corporations face the challenge of navigating insolvency cases and proceedings in international jurisdictions. These challenges showcase the requirement of insolvency laws that fosters efficacy and justice across international borders. The article discusses the emergence and procedure of international legislative frameworks and mechanisms that aim to provide guidelines for the recognition and enforcement of international insolvency proceedings, judgements and orders. Globalization poses various challenges for corporate insolvency laws. One challenge is the increasing complexity of cross-border corporate structures. This can make it difficult to determine which jurisdiction's laws should apply to insolvency proceedings. Another challenge is the fact that different jurisdictions have different approaches to corporate insolvency law. This can lead to conflicts of law and make it difficult to coordinate insolvency proceedings across borders. In response to these challenges, there has been a growing trend towards harmonization of corporate insolvency laws. This is guided by various factors, including the importance of international trade and investment, the development of international financial markets, and the necessity to safeguard the interests of stakeholders in international insolvency proceedings.
Insolvency occurs when an individual or a corporation is unable to meet its financial obligations. It is a condition of financial distress when a person or a business is unable to pay its debts to its creditors. Insolvency may arise due to poor cash management, reduced cash flow or increased expenses.[1] In particular, corporate insolvency is a corporation’s inability to pay its debts to its creditors, including banks, financial institutions and suppliers.[2] When a company or a business becomes insolvent, corporate insolvency laws come into picture. An efficient corporate insolvency regime means a sound framework for closing business - it breaks up assets of a nonviable business so that those assets can be sold as part of a going concern, it saves viable businesses through a restructuring process and it also improves credit by giving creditors a tool to claim and collect their credit even in absence of guarantees.[3] Corporate insolvency laws are of significance for a variety of reasons. They provide a legislative and administrative framework for companies, businesses, enterprises and corporations that have defaulted on their debt obligations, which in turn helps protect creditors and reduces economic disruption. Insolvency laws help promote economic growth and efficiency by allowing corporations to be liquidated and restructured in a timely manner. Insolvency laws also help ensure that shareholders are held accountable for their actions.
Corporate Insolvency Regime in a Global Economy
In a globalized economy, the corporate insolvency framework plays a vital role in accelerating and promoting cross-border trade and investment and in protecting and enforcing the rights and interests of shareholders, creditors and various stakeholders. Different jurisdictions around the world have different approaches to corporate insolvency. This creates challenges for corporations operating in multiple foreign jurisdictions and legal systems, and for creditors trying to recover debts from insolvent corporations located in foreign jurisdictions. For ensuring that creditors and stakeholders are treated fairly and efficiently, there is a need to approach corporate insolvency proceedings in an adaptable, cooperative and coordinated manner. In a globalized economy, corporate insolvency laws have taken the shape of cross-border or international insolvency laws. Cross-border insolvency laws have become important because corporations in a globalized economy operate in different parts of the world and their shareholders and creditors are located in multiple jurisdictions. This makes it more complex and time-consuming to resolve international insolvency cases and proceedings. Cross-border and international insolvency cases and proceedings are a product of a global market and a globalized economy and must be handled in such a way that they accommodate the rights and obligations of corporations, shareholders, creditors and stakeholders and the various jurisdictions in different countries.
Cross-Border Complexity: A Key Challenge
Corporate insolvency cases and proceedings in a global context face the challenge of cross-border complexity.[4] Cross-border insolvency or international insolvency means the state in which an insolvent debtor has credit or debtors in two or more jurisdictions or countries.[5] Multinational companies operate in different countries and jurisdictions leading to disputes over jurisdictions and conflicting laws. If a foreign court has passed a judgement to wound up a company, the question arises whether it is possible to enforce that judgement in the country where the company operates or has assets. This is because countries have different laws, rules and regulations on the recognition and enforcement of foreign judgements. In the context of globalization, there is a rapidly growing need for harmonization and confluence of corporate insolvency rules and regulations across nation-states and jurisdictions.
The Need to Harmonize Cross-Border Insolvency Laws
Different countries adopt different approaches towards cross-border insolvency laws. Such approaches often have certain underlying principles. Even when insolvency proceedings result in a ruling, it may be difficult to enforce that decision internationally. Ensuring that judgements are respected and carried out is hampered by disparate legal systems, cultural norms, and enforcement strategies. Such principles are described and systemized into three groups. Firstly, cross-border insolvency laws are formed on the basis of jurisdictional principles, which means that cross-border insolvency laws affect the authority of more than one jurisdiction. Such principles include unity, universality, equality, mutual trust, cooperation and communication, subsidiarity, and proportionality. The second group comprises procedural principles, such as efficiency, transparency, predictability, procedural justice, and priority. Secondly, there are procedural principles that include efficiency, transparency, predictability, procedural justice, and priority. Finally, the substantive principles that reflect the impact of insolvency proceedings on substantive legal positions.[6] Nonetheless, most governments' laws pertaining to corporate insolvency share certain fundamental elements. These consist of:
The equality of creditors principle states that all creditors, regardless of the type of debt they owe the company, should receive an equal share of its assets.
The maximisation of value principle states that all stakeholders should gain from the insolvency process by making the most of the company's assets.
The notion of certainty and predictability dictates that the rights of stakeholders should be well-defined and the insolvency process should be impartial and transparent.
The choice of approach depends on the country’s economy, financial conditions, size and market share of the corporation and the complexity and nature of the company’s debt and obligations. This is why it is important to adopt an harmonized approach in cross-border insolvency proceedings. The demand for insolvency laws across jurisdictions to be more unified and convergent is developing in the face of globalisation. In order to facilitate the handling of cross-border insolvency matters, certain nations have taken attempts to develop more standard insolvency legislation.
Role of International Organizations, Agreements and Conventions in Streamlining Cross-Border Insolvency Laws
To address cross-border insolvency and complexity issues, there are international conventions and treaties in place which provide a framework for the recognition and enforcement of foreign and cross-border insolvency cases and proceedings. International organizations, such as the United Nations has developed a Model Law on cross-border insolvency. This Model Law is known as the United Nations Commission on International Trade Law (UNCITRAL)[7]. The UNCITRAL plays an important role in the development of guidelines, rules and regulations to address cross-border and foreign insolvency issues. The European Union (EU)[8] has also set in place certain rules and regulations to address cross-border and foreign insolvency cases within its member nation-states. The insolvency regulation of the EU provides a framework for coordinating and streamlining cross-border insolvency cases. Another insolvency rule at the international level is the Cross-Border Insolvency Concordat as approved and adopted by the Council of the Section on Business Law of the International Bar Association (IBA)[9]. Understanding the role of such international organizations, agreements, treaties and conventions is important in the context of globalization.
Understanding the International Bar Association’s Cross-Border Insolvency Concordat
The other example of international rules is the IBA’s Cross-Border Insolvency Concordat which “has been designed as something in the nature of a ‘road map’ to assist insolvency practitioners actually faced with concurrent proceedings in relation to the same debtor in two or more different jurisdictions. Rather than leaving the insolvency practitioners to start from scratch and try to forge a one-off agreement (acceptable to their respective courts) as to the proper coordination of the two sets of proceedings, the Concordat sets out a small number of essential principles which can be adopted, with appropriate modification, to suit the particular facts involved. Experience has revealed the sorts of issues which are likely to be raised where there are concurrent reorganisations or liquidations; and the Concordat provides a clear and ready-made basis for negotiation at the earliest stages of the process.”[10]
Understanding the UNCITRAL Model Law
As its name suggests, the UNCITRAL Model Law forms an example or a basis or a “model” for countries to adopt and enforce insolvency laws as they wish. The aim of the UNCITRAL Model Law is to deal with cross-border insolvency cases and proceedings in such a way as to promote cooperation and coordination among the courts of different jurisdictions, legal certainty for creditors, efficient administration of cross-border insolvency issues and rescue of financially troubled businesses. “The Model Law respects the differences between national procedural laws and does not attempt a substantive unification of insolvency law. The solutions offered by the Model Law include the following:
providing access for the person administering a foreign insolvency proceeding (‘foreign representative’) to the courts of the enacting state and allowing the courts in the enacting state to determine what relief is warranted for optimal disposition of the insolvency;
determining when a foreign insolvency proceeding should be accorded ‘recognition’, and what the consequences of recognition may be;
providing a transparent regime for the right of foreign creditors to commence, or participate in, an insolvency proceeding in the enacting state;
permitting courts in the enacting state to cooperate more effectively with foreign courts and foreign representatives involved in an insolvency matter;
authorising courts in the enacting state and persons administering insolvency proceedings in the enacting state to seek assistance abroad;
providing for court jurisdiction and establishing rules for coordination where an insolvency proceeding in the enacting state is taking place concurrently with an insolvency proceeding in a foreign; and
establishing rules for coordination of relief granted in the enacting state in favour of two or more insolvency proceedings that take place in foreign states regarding the same debtor.”[11]
The UNCITRAL Model Law contains an optional clause wherein special insolvency framework applicable to banks or insurance companies may be excluded from its scope.[12] This explains that the UNCITRAL Model Law does not mandatorily address insolvency proceedings of financial institutions. In jurisdictions where the Model Law is adopted, the financial institutions would be subject to the general insolvency laws of the Model Law if the optional clause is not applied. The comments to the Model Law explain that the reason for the regulation for the winding up of credit institutions is that prompt action may be called from competent authorities in relation to such institutions.[13]
The Model Law also addresses the fact that the adopting state can access foreign representatives and creditors to courts. A foreign representative can have access to the courts of the adopting states and allows the courts in the adopting states to determine the reliefs and remedies. A regime is set up for the foreign creditors to commence or participate in the insolvency proceedings in the adopting state.[14] The Model Law also provides a framework for the recognition of foreign proceedings.[15] It also lays down rules on cooperation with foreign courts and representatives, empowering courts and competent authorities in the adopting state to seek assistance outside the state.[16] The Model Law also lays down rules for coordination when insolvency proceedings in the adopting state are conducted concurrently with proceedings in another state. Such rules also lay down the procedure for coordinating relief granted in the adopting state in favour of more than one insolvency proceeding that are conducted in foreign states regarding the same debtor.[17] The Model Law also states that exceptions to general rules may be applied to secured claims, set-off and execution of rights in rem, in certain cases.[18] It makes a distinction between normal foreign proceedings and main proceedings. The designation of a foreign proceeding as a main proceeding lies in the fact that a foreign proceeding becomes a main proceeding when it takes place in the state where the debtor has his centre of main interests, which might affect the nature and scope of the relief or remedy granted to the foreign creditors.[19]
Understanding the EU Insolvency Regulation Regime
The newly enacted EU regime on cross-border insolvency consists of a set of laws, rules and regulations that particularly address cross-border insolvency cases and proceedings governing several member-states within the same region. The EU regime on cross-border insolvency is not comparable to the other international attempts of cross-border insolvency rule making. This is because the EU regime has been drafted within the existing EU legislative and institutional framework. The EU regime was seen as difficult to adopt and was under consideration over 10 years. The EU regime initiative later on led to the adoption of three legislations in relation to the insolvency of different categories of legal entities.
One regulation on cross-border insolvency cases and proceedings has been enacted to govern legal entities apart from investment firms, collective investment schemes, credit institutions and insurance undertakings, and two directives have been enacted to govern the winding up, liquidation, reorganisation and restructuring of credit institutions and insurance undertakings.[20] Such recently adopted EU-wide regulations and directives will ensure that there is mutual recognition, cooperation and coordination of national insolvency cases and proceedings, however, insolvency laws, rules and regulations will still fall within the ambit of the national legislative framework of the EU member-states.
Conclusion
Corporate insolvency laws play a crucial role in a globalized economy by providing regulatory guidelines and governing framework for resolving financially distressed corporations. Such laws impact the stability, security and resilience of financial systems and businesses across the globe. These laws not only solve financial distress of companies but also help protect the rights and interests of shareholders, creditors and stakeholders, while also fostering economic growth, efficiency and competitiveness. Cross-border insolvency laws reinforce the significance of international cooperation, harmonization and adaptability to promote economic growth and secure the interests of stakeholders in a global economy. The interconnectedness of the globalized economy has led to an increase in the number of cross-border transactions, deals and investments. This has also led to an increase in the number of challenges and while there is still a number of challenges to be addressed, there is a growing trend for the harmonization of cross-border insolvency laws in recent years. This can be seen as a positive development for an interconnected, globalized economy, as it will help create a more transparent, efficient and predictable environment for cross-border and international transactions. In a globalised economy, it is essential to comprehend and deal with the complexity of corporate insolvency in order to preserve economic stability and encourage global trade. To better meet the demands of a globalised environment, scholars and legislators should keep looking at creative fixes and modifications to corporate insolvency rules.
The author of this article is Vishakha Bhandakkar, an LLM (Corporate & Financial Law & Policy) student at Jindal Global Law School, O.P. Jindal Global University, Sonipat.
[1] A Tuovila, 'Insolvencies: Definition, How It Works, and Contributing Factors' (2023)
[2] A Gurrea-Martínez, 'The Role of Corporate Insolvency Law in the Promotion of Economic Growth' (2020)
[3] A Kashyap, Corporate Insolvency Law and Bankruptcy Reforms in the Global Economy (IGI Global, 2018)
[4] Bank for International Settlements, 'Cross-Border Aspects of Insolvency' (2020)
[5] Bank for International Settlements, 'Cross-Border Aspects of Insolvency' (2020)
[6] Reinhard Bork, 'Principles of Cross-Border Insolvency Law – and their Value for Judges and Legislators' (2016)
[7] ‘UNCITRAL Model Law on International Commercial Arbitration (1985), with amendments as adopted in 2006’
(United Nations Commission on International Trade Law)<https://uncitral.un.org/en/texts/arbitration/modellaw/commercial_arbitration> Accessed 28 Oct 2023
[8] Matthew J. Gabel, ‘European Union’ (Britannica, 27 Oct 2023)<https://www.britannica.com/topic/European-Union> Accessed 28 Oct 2023
[9]‘About the IBA, (International Bar Association)<https://www.ibanet.org/About-the-IBA> Accessed 28 Oct 2023
[10] Smart, Cross-border insolvency (1998), p 7.
[11] Paper by J Sekolec, ‘The UNCITRAL Model Law on Cross-Border Insolvency’, in M Giovanoli and G Heinrich (eds) International bank insolvencies - a central bank perspective (1999), pp 338f.
[12] Article 1 (2) of the UNCITRAL Model Law.
[13] Article-by-article comment on the UNCITRAL Model Law, Article 1 (2).
[14] Articles 9-14 of the UNCITRAL Model Law.
[15] Articles 15-24 of the UNCITRAL Model Law.
[16] Articles 25-27 of the UNCITRAL Model Law.
[17] Articles 28-32 of the UNCITRAL Model Law.
[18] Article 20 (2) of the UNCITRAL Model Law.
[19] Article 2 (c) of the UNCITRAL Model Law.
[20] Council Regulation (EC) No. 1346/2000 of 29 May 2000 on insolvency proceedings (the EU Insolvency Regulation), OJ L 160, 30.6.2000, pps 1-18. The EU Insolvency Regulation became effective and directly applicable in all EU member states on 31 May 2002.
Directive (EC) No. 2001/17 of the European Parliament and Council of 19 March 2001 on the reorganisation and winding-up of insurance undertakings (the EU Winding-up Directive for insurance undertakings), OJ L 110, 20.4.2001, pps 28-39. Member states are required to implement the Winding-up Directive for insurance undertakings into their respective national legal regimes by 20 April 2003.
Directive (EC) No. 2001/24 of the European Parliament and of the Council of 4 April 2001 on the reorganisation and winding-up of credit institutions (the EU Winding-up Directive for credit institutions), OJ L 125, 5.5.2001, pps 15-23. The timeframe for member states to implement the Winding-up Directive for credit institutions is 5 May 2004.
Refrences:
● A Tuovila, 'Insolvencies: Definition, How It Works, and Contributing Factors' (2023)
● A Gurrea-Martínez, 'The Role of Corporate Insolvency Law in the Promotion of Economic Growth' (2020)
● A Kashyap, Corporate Insolvency Law and Bankruptcy Reforms in the Global Economy (IGI Global, 2018)
● Bank for International Settlements, 'Cross-Border Aspects of Insolvency' (2020)
● Reinhard Bork, 'Principles of Cross-Border Insolvency Law – and their Value for Judges and Legislators' (2016)
● ‘UNCITRAL Model Law on International Commercial Arbitration (1985), with amendments as adopted in 2006’
● (United Nations Commission on International Trade Law)<https://uncitral.un.org/en/texts/arbitration/modellaw/commercial_arbitration>
● Matthew J. Gabel, ‘European Union’ (Britannica, 27 Oct 2023)<https://www.britannica.com/topic/European-Union>
● About the IBA, (International Bar Association)<https://www.ibanet.org/About-the-IBA>
● Smart, Cross-border insolvency (1998), p 7.
● Paper by J Sekolec, ‘The UNCITRAL Model Law on Cross-Border Insolvency’, in M Giovanoli and G Heinrich (eds) International bank insolvencies - a central bank perspective (1999), pp 338f.
● The UNCITRAL Model Law
● The EU Insolvency Regulation
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