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Insolvency law is the root of commercial and financial law because it obliges the law to choose. There is not enough money to go around and so the law must choose whom to pay. The choice cannot be avoided or compromised or fudged. The law must always decide who is to bear the risk so that there is always a winner and a loser. On bankruptcy it is difficult to split the difference. That is why bankruptcy is the most crucial indicator of the attitudes of a legal system and arguably the most important of all legal disciplines. (Wood 1995, 1)
1 A cross-border insolvency arises when an insolvent entity has assets or debts in more than one state.1 When a cross-border insolvency involving New Zealand arises there are two possibilities: first, a New Zealand court may seek assistance from a foreign court for the purpose of enabling an insolvency administrator in New Zealand to fulfil duties under New Zealand law; second, a foreign court might seek assistance from a New Zealand court for similar purposes. In both situations there are three distinct aspects: first, the procedure by which assistance is sought; second, the substantive law which will apply in determining whether assistance will be given; and third, if the court decides to give assistance, the substantive law which will be applied in determining the nature and extent of the assistance.
2 Many cross-border insolvency cases before the courts over the last ten or so years have arisen out of commercial fraud perpetrated out of the ability to process in seconds huge numbers of high unit transactions transferring large amounts of money from one financial centre to another (Goode 1987, 435–436; also Cooper 1998, 2). Indeed, relatively recently Lord Millett (as he now is) was moved to say that “[i]nternational fraud is a growth business” (Millett 1991, 71).
3 Lest the statement made by Lord Millett be regarded as an exaggeration one can point to cases arising out of the aftermath of the collapse of companies such as Maxwell Communications Corporation plc: Re Maxwell Communications Corporation plc [1992] BCC 757; Bank of Credit and Commerce International SA: Re Bank of Credit and Commerce International SA [1992] BCC 83, and Barings Bank (see Miyake 1996, 238). Closer to home, the collapse of certain companies had cross-border implications for companies left insolvent as a result of fraudulent activities, for example, Equiticorp Industries Group Limited: Equiticorp Industries Group Limited (In Statutory Management) v The Crown (No 2) [1996] 3 NZLR 685; (No 51) [1996] 3 NZLR 690; (No 47) [1998] 2 NZLR 481; and Cory-Wright and Salmon Limited: Grayburn v Laing [1991] 1 NZLR 482.
4 The increasing ease with which major fraud can be perpetrated increases the likelihood of cross-border insolvency problems and provides an incentive for developing modern cross-border insolvency laws. It would be wrong to wait for cross-border insolvencies to become commonplace before considering legislation.
5 When a New Zealand business enterprise is put into a formal insolvency regime the administrator of the regime may need assistance from a foreign court to realise assets in the foreign jurisdiction for the benefit of New Zealand creditors.2 In doing so, it will be necessary for the insolvency administrator to consider the law of the state from which aid is sought: the substantive insolvency law of that state is likely to affect the extent to which specified creditors are entitled to obtain priority payment out of assets situated in their country.
6 When the administrator of an insolvent business enterprise situated in another state seeks assistance from a New Zealand court to gain the benefit of assets situated in New Zealand, similar considerations apply. Such considerations will affect the question of whether, and if so to what extent, assistance should be given by a New Zealand court. Cases will vary enormously in type. At one end of the scale are cases where a foreign representative simply seeks to close a bank account in New Zealand and to repatriate funds for distribution among creditors in circumstances where there are no competing creditors in New Zealand. At the other end of the scale can be a case in which there are many creditors in New Zealand and the decision whether New Zealand creditors will be paid in full or will be paid a dividend of, say, 20 cents in the dollar will turn on whether the funds are repatriated to the foreign insolvency representative for the purpose of distribution among all, rather than only the New Zealand, creditors.
7 When cross-border insolvency issues arise there is an obvious public interest in ensuring procedures are in place to allow the claims to be determined both efficiently and in accordance with principle. A framework for doing so has been established by the United Nations Commission on International Trade Law (UNCITRAL) in its Model Law on Cross-border Insolvency (referred to in this report as the Model Law), approved by the General Assembly of the United Nations in May 1997. The Model Law is accompanied by a Guide to Enactment (referred to as the Guide) produced by the Secretariat of UNCITRAL. The Model Law and the Guide are reproduced in the appendix to this report for ease of reference. The Model Law and the Guide, as well as papers of the Working Group on Insolvency can be found at www.un.or.at/uncitral/english/sessions/index.htm or www.un.or.at/uncitral/english/bibliography/consolid.htm. It is intended that the comments made in the text of this report supplement the comments contained in the Guide. The paragraph numbers in the appendix are those used in the Secretariat’s Guide.
8 The Model Law is essentially procedural in nature. It enables local assets to be governed by local law yet does not attempt to unify the substantive insolvency law of individual states. Nor does it require reciprocity in the jurisdiction in which the proceedings originated as a condition of making an order. It is conceivable that a requirement of reciprocity might arise out of case law, particularly if courts in one state interpret the provisions of the Model Law more restrictively than courts in other states.
9 Article 7 of the Model Law envisages that a court may make an order either under the Model Law or under some alternative cross-border insolvency law in force in the state in question. In essence, this gives the court power to choose an appropriate remedy: a New Zealand court does not presently have that option. In broad terms, however, the position is not dissimilar from that which currently applies when a creditor (who may have dissented at a meeting of creditors) seeks an order of adjudication in bankruptcy against an individual who, contemporaneously, is seeking approval of a Proposal filed under Part XV of the Insolvency Act 1967. The court, in determining which order is more appropriate in the circumstances, effectively chooses between two available and alternative remedies. The most appropriate remedy to fit the circumstances will be chosen by the court. We discuss whether it is appropriate to have parallel remedies on the statute book later (see paras 53 and 114–117).
10 Because the Model Law is essentially procedural in nature it is unnecessary for us to consider the substantive domestic insolvency law of either New Zealand or other states. It is fair to say, however, that if the Model Law is adopted, there will be a degree of shift in the domestic law of New Zealand towards what might be described as a more universalist approach to cross-border insolvency. What is meant by that shift is discussed in paras 13–19.
11 Bebchuk and Guzman pointed out in the National Bureau of Economic Research working paper, “An Economic Analysis of Transnational Bankruptcies”, that a state could benefit from a territorial approach but that the benefits of that approach were limited to domestic creditors:
Our results show . . . that a territorialist country can benefit from territorialism if we assume that investment carries with it positive spillovers such as employment, technology, taxes, and so on. The losers – the ones who pay for the benefits gained by the territoralist country and the dead weight loss that is generated – are foreign firms.
In light of the above finding, we are able to draw certain conclusions about the “political economy” that is at work. Territoralism is inefficient and reduces global welfare, but each country acting individually, has an incentive to adopt a territoralist regime. This highlights the need for a reciprocity requirement or, ideally, international treaties on the subject. (Bebchuk and Guzman 1998, 4)
12 On the other hand, a universalist approach will provide more incentive for foreign firms to invest as investment decisions can be made safely on the assumption that all creditors will be treated equally in insolvency (Bebchuk and Guzman 1998, 18).
13 By way of background, it is necessary to consider insolvency law in an international context and to describe the competing theories which have influenced the approach of particular laws enacted in various states to cross-border insolvency issues.
14 There has been debate internationally for many years over whether a bankruptcy has universal application or whether its application is limited to the place of adjudication. Those competing theories are known as the “universality” and “territorial” theories of bankruptcy laws. Out of that debate a third theory emerged which is known as “modified universality”.
15 As long ago as 1764 it was held in Solomons v Ross (1764) 1 H Bl 131n that the doctrine of “ubiquity of bankruptcy” was part of English law.3 Subsequently – and contrary to the doctrine of ubiquity – it was held that a discharge in bankruptcy in another jurisdiction did not release that party from liability in respect of a contract made and to be performed in England: Re United Railways of The Havana and Regal Warehouses Ltd [1957] 3 All ER 641, citing Anthony Gibbs and Sons v La Societe Industrielle et Commercial des Metaux (1890) 25 QBD 399 (CA).
16 In a scholarly analysis of the competing theories Nadelmann noted (in 1946) that:
Beginning with Savigny, who relied on Story for his information, the supporters of the theory that bankruptcy declared at the domicil of the debtor must be recognised everywhere, have referred to the position taken by the English Courts [in Solomons v Ross]. Objection to the doctrine of ubiquity, on the other hand, led to the refusal of the Courts in the United States to follow Solomons v Ross. (Nadelmann 1946, 154)
17 The United States abandoned notions of “territorialism” in favour of what has been described as “modified universalism” (Westbrook 1991, 499). As Phillip Smart observes in his seminal treatment of the subject:
Yet while a foreign bankruptcy might vest movables in England in the foreign assignee, English law has never adopted the doctrine of the unity of bankruptcy [under which only one set of proceedings, given effect everywhere, is permitted]. In other words, and as was perhaps only to be expected, the pragmatic English judiciary rejected theoretical extremes: neither the strict territorial approach nor the unity of bankruptcy was accepted. Thus even now English rules of cross-border insolvency permit a plurality of insolvency proceedings yet, at the same time, recognise that a foreign adjudication may have significant consequences within the United Kingdom. (Smart 1991, ix)
We believe that the Model Law can be correctly characterised as an example of “modified universalism”.
18 In the United States, Congress established the National Bankruptcy Review Commission to consider a variety of law reform issues affecting bankruptcy law in the United States.4 The Commission reported in October 1997 releasing a report entitled Bankruptcy: The Next Twenty Years. The Commission opened its discussion on cross-border insolvency with the following observations:
Although there is widespread agreement that the globalization of trade and enterprise requires a coordinated approach to international bankruptcy, the field of bankruptcy law (or, as most of the world calls it, “insolvency law”) has remained steadfastly parochial. “Territorialism” or the “grab rule” has prevailed since time immemorial. When a person or a company with international operations falls into serious financial trouble, each country employs its insolvency laws to grab local assets and administer them locally according to the procedures and priorities of that country’s laws. Even where no local proceeding is opened, the delay and expense of obtaining local judicial cooperation with a foreign insolvency proceeding encourages debtors to conceal assets in foreign caches and prevents realization of full value for assets that are recovered. (Bankruptcy: The Next Twenty Years, 353)
19 Five major disadvantages of a territorial approach were identified at pages 353–354 of the report:
20 Procedural differences exist between jurisdictions which are based on the common law and those which have a civil law base. In the common law jurisdictions the doctrine of comity will apply to assist insolvency administrators appointed in one jurisdiction to gain recognition in other jurisdictions. In civil law jurisdictions the process of exequatur is used to similar effect.5 In the introduction to the Guide to Enactment, those involved in formulating the Model Law recognised that approaches
based purely on the doctrine of comity or on the exequatur do not provide the same degree of predictability and reliability as can be provided by specific legislation, such as the one contained in the Model Law, on judicial cooperation, recognition of foreign insolvency proceedings and access for foreign representatives to courts. For example, in a given legal system general legislation on reciprocal recognition of judgments, including exequatur, might be confined to enforcement of specific money judgments or injunctive orders in two-party disputes, thus excluding decisions opening collective insolvency proceedings. Furthermore, recognition of foreign insolvency proceedings might not be considered as a matter of recognizing a foreign “judgment”, for example, if the foreign bankruptcy order is considered to be merely a declaration of status of the debtor or if the order is considered not to be final. (Guide to Enactment 8–9)
21 New Zealand bases its law on the English common law. The doctrine of comity has therefore been embraced in New Zealand. The underlying principle of comity is that one should do unto others as they would do unto you. An example of this underlying principle is Hilton v Guyot 59 US 113 (1895). In that case the Supreme Court of the United States proceeded on the basis that comity was a matter of discretion and that the question of whether the state seeking assistance would itself grant assistance was a factor to be taken into account in exercising that discretion (212–213). The principle of comity embodied in Hilton v Guyot has been applied in New Zealand recently on two occasions: Fournier v The Ship “Margaret Z” [1997] 1 NZLR 629 and Turners & Growers Exporters Limited v The Ship “Cornelis Verolme” [1998] 2 NZLR 110.
22 We discuss in paras 54–58 the nature of the doctrine of comity as applied in New Zealand case law. But, for present purposes, it is important to note that the term has two quite distinct applications. When used in a context unrelated to formal insolvency procedures (eg, where a creditor is seeking to enforce rights against a debtor in personam), the term “comity” has been legally defined as
neither a matter of absolute obligation, on the one hand, nor of mere courtesy and good will upon the other. But it is the recognition which one nation allows within its territory to the legislative, executive or judicial acts of another nation, having due regard both to international duty and convenience, and to the rights of its own citizens or other persons who are under the protection of its laws. (Hilton v Guyot 59 US 113 (1895) 163–164)
23 Comity has a rather different meaning when bankruptcy, or some other form of collective insolvency process, is involved. In Curnard Steamship Co Ltd v Salen Reefer Services AB 773 F 2d 452 (1985), the Second Circuit of the United States Court of Appeals held that:
The granting of comity to a foreign bankruptcy proceeding enables the assets of a debtor to be dispersed in an equitable, orderly, and systematic manner, rather than in a haphazard, erratic or piecemeal fashion. Consequently, American courts have consistently recognized the interest of foreign courts in liquidating or winding up the affairs of their own domestic business entities. . . . It has long been established that foreign trustees in bankruptcy were granted standing as a matter of comity to assert the rights of the bankrupt in American courts. . . . Although the early cases upheld the priority of local creditors’ attachments . . . the modern trend has been toward a more flexible approach which allows the assets to be distributed equitably in the foreign proceeding. (458)6
24 The justification for the granting of comity to foreign insolvency proceedings is the need to ensure that a debtor’s property is realised as quickly as possible for the benefit of all creditors entitled to participate in the distribution of assets. It is also consistent with economies of scale in having an individual insolvency administrator act on behalf of all creditors,7 with a view, subject to priorities accorded by national legislation, to ensuring maximum returns to creditors on a pari passu basis (ie, an equal distribution of the realisation of assets among creditors of equal priority).
25 As well as distinctions based on historical heritage (ie, common law or civil law origin) different values underpin the domestic insolvency laws in different states. Countries have insolvency laws which fall between the two extreme descriptions of “pro-debtor” or “pro-creditor”.8 Any uniform procedural law which deals with cross-border insolvency issues needs to respect these differences while, at the same time, putting in place a process that enables practical problems to be resolved.
26 Theoretical extremes for international insolvency laws were rejected by the “pragmatic English judiciary” (Smart 1991, iv). This meant that neither a strict territorial approach nor an approach based on the universal application of the law was fully accepted as a matter of English law. The same degree of pragmatism is alive and well in New Zealand. Indeed, for any insolvency law to function, a healthy mix of principle and pragmatism is required. The degree of pragmatism required to provide solutions to a clash between insolvency laws based on different values is even greater than the degree of pragmatism required to make domestic insolvency law work.
27 The Model Law bridges theoretical bases for cross-border insolvency law. The goal of the Model Law is based on universality: recognition, assistance and co-operation between states are encouraged. But the Model Law does not create a regime in which one insolvency proceeding necessarily dominates. As noted by Glosband and Tobler, “[i]nstead, the Model Law anticipates concurrent proceedings which it attempts to coordinate”. Moreover,
[l]ocal parties . . . always retain the option of retreating to the familiar territory of a local proceeding. This deference to local proceedings was a political necessity and accommodates concerns about potentially over-intrusive foreign proceedings dominating local insolvency systems. (Glosband and Tobler 1998, 12)
It is for these reasons that we characterise the Model Law as “modified universalism”.
28 In the United States, the Model Law provisions were passed by each House of the United States Congress as part of comprehensive insolvency reform legislation. Disagreements over other parts of the legislation kept the two Houses from agreeing on a final Bill that reconciled differences in non-Model Law parts of the Bills prior to the end of the legislative session in November 1998. The Model Law provisions are expected to be re-introduced in the Congressional session which began in January 1999 and can be monitored at www.abiworld.org. We are informed that there is agreement between the two Houses of Congress as to the need for legislation based on the Model Law and that enactment in 1999 is likely.
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