Cross-Border Insolvency of Financial Institutions

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Institute for Law and Finance

LL.M. FinancePage

Cross-Border Insolvency of FinancialInstitutions

Zokirjon AbdusattarovZhaoji Wu


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Introduction: Why Is This Topic Important?

The growth of multinational businesses in the twentieth century created thepossibility of transnational insolvencies.

The legal rules governing insolvency law and practice are rooted deeply in thelegal traditions of individual countries. In part this arises because insolvencylaw preempts and supersedes many rules of both substantive and procedurallaw.

The insolvency or reorganization of a multinational enterprise facing financialdifficulties can present extremely complex international legal problems.

The importance of national economic interests varies from country to

country, resulting in very different insolvency laws. This presentation deals with transnational or cross-border insolvencies and the

legal regime that governs the resolution of these controversies


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Nature of International Insolvencies In its simplest form, a transnational

insolvency may involve aninsolvency proceeding in onecountry, with creditors located in atleast one additional country. In themost complex case, it may involvesubsidiaries, assets, operations, andcreditors in dozens of nations.

One of the most noteworthy features of international bankruptcy law is the lack of legal structures,

either formal or informal, to deal with an insolvency that crosses national borders. In addition,problems unique to transnational insolvency cases require special consideration.


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Underlying Approaches to Cross-BorderInsolvency

Multinational insolvency proceedings frequently result in competing interestsamong the jurisdictions involved. The two dominant models for addressinginternational insolvency problems are universality and territoriality.

Under the universality approach , toward which U.S. courts are moving, aninternational insolvency case is treated, insofar as possible, as a single caseand the creditors treated equally wherever they might be located.

Under the territoriality approach , each country looks out for its own

creditors before contributing assets to pay creditors in other countries.


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Territoriality approach

Each nation conducts its own insolvency proceeding with respect to the assetslocated within its jurisdiction and disregards any parallel proceedings in aforeign nation.

The court uses "local assets to satisfy local claimants in local proceedings withlittle regard for proceedings or parties elsewhere....

Territoriality takes the pessimistic view that local claimants ultimately will notreceive their fair share of the assets in a foreign insolvency. Consequently,under this approach a local court must provide for these creditors as well aspossible, given the assets within the court's jurisdiction.


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Universality approach

Under the universality approach, a single forum should apply "a single legalregime to all aspects of a debtor's affairs on a worldwide basis."

Universality is based on the assumption that, without coordination of laws and

courts of different jurisdictions in transnational cases, the optimal use anddistribution of assets cannot be accomplished, and asset waste and turmoil arecertain to result.

In practice, no country applies either the universality or territoriality approach

without modification


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Sources of Cross-Border Insolvency Laws


UNCITRAL Model Law on Cross-Border Insolvency May,1997 Council regulation (EC) No 1346/2000 of 29 May 2000 on insolvency proceedingsDirective 2001/17/EC on the reorganisation and winding-up of insuranceundertakingsDirective 2001/24/EC on the reorganisation and winding-up of credit institutions

Directive 90/314/EC re the insolvency of a Tour Operator;

Directive 97/9/EC re Investor Compensation Schemes; Directive 2000/35 with regard to Late Payments in Commercial Transactions;Directive 2000/74 on the Protection of Employees in the Event of Insolvency of their Employer (updating Directives 77/187 and 80/987) Directive 2001/23/EC (consolidating Directives 77/187/EC and 1998/50/EC) withregard to Safeguarding of Employees' Rights in the event of Transfer of Undertakings;and Regulation 2001/2157 with regard to the European Company Statute, in which Article67 provides that a European Company will be treated as a public limited company inaccordance with the law of the Member State in which its registered office is situated.


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The Objectives of the UNCITRAL Model Law

(a) cooperation between the courts and other competentauthorities of this State and foreign States involved in cases of cross-border insolvency;

(b) greater legal certainty for trade and investment;

(c) fair and efficient administration of cross-border insolvenciesthat protects the interests of all creditors and other interestedpersons, including the debtor;

(d) protection and maximization of the value of the debtor'sassets; and

(e) facilitation of the rescue of financially troubled businesses,thereby protecting investment and preserving employment.


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Drawbacks of the Model Law

The Model Law is not the ultimate step in internationalcooperation in insolvency cases. It leaves unresolved manydifficult legal issues. Notably, the Model Law has no provision togovern conflict-of-laws and choice-of-law issues.

Financial Groups or Business Enterprise Groups are notregulated. It leaves the door open for the states to adjust the Model Law so

that it does not apply to certain sectors of economy, namely,section 1 of Article 1 hints that this Law does not apply toproceedings concerning such entities as banks or insurancecompanies, that are subject to a special insolvency regime in thisState.


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Principal Provisions of the EC InsolvencyRegulation:

Main Proceedings and the Centre of Main Interests(COMI); Secondary Proceedings and Establishment;

Conversion of earlier proceedings; Applicable law and Settlement finality regulations; Unforeseeable transactions; Creditors claims and co-operation between office holders;

Recognition of insolvency proceedings in other member states;


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The aforementioned Directives are in nature and content quite

similar to the Insolvency Regulation. The differences flow from somespecific characteristics:


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In relation to credit institutions, three other EC measures are of importance:

1. Deposit-guarantee schemes . The main objective of this Directive 94/19 (Official Journal L 135 of 31 M ay 1994) is to protect a depositor up to 20,000 in the event of a deposit becoming unavailable, e.g. , when a bank becomes insolvent. A home Member State bank is responsiblefor the deposit protection scheme for branches established in other EEA Member countries. The EEA (European Economic Area) countries contain the 27 EU Member States and also Norway, Iceland and Liechtenstein. Home country schemes must guarantee repayment of bank deposits and deposits held at branches set u p by banks in other Member S tates, although branches may opt to join a host country protection scheme.


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2. Netting and securities settlement systems . The EU Directive 1998/26 (Official Journal L 166 of 11 June 1998) protects netting in payment and securities settlement systems and insulates collateral given to operators of these systems or the Central Banks in the performance of their functions from the effect of bankruptcy. The implementation date was 1 January 1999.

3. Financial collateral arrangements . An EU Directive on Financial Collateral Arrangem ents has been issued (Official Journal C 180 of 26 June 2001). It will apply to collateral arrangements between parties, providing a uniform conflict-of-laws treatment of book entry securities used as collateral in a cross-border context and protects these arrangements from the eff ectsof bankruptcy. The implementation date was 27 December 2003, and most EU Member States have enacted legislation on the topic.


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Case Study : Eurofood IFSC Ltd. Where a debtor is a subsidiary company whose registered officeand that of its parent company are situated in two different MS,the presumption laid down in the second sentence of Article 3(1)of Council Regulation (EC) No 1346/2000 of 29 May 2000 oninsolvency proceedings, whereby the centre of main interests of that subsidiary is situated in the MS where its registered office issituated, can be rebutted only if factors which are both objective and ascertainable by third parties enable it to be established

that an actual situation exists which is different from that whichlocation at that registered office is deemed to reflect.


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Thank You!

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Cross-Border Insolvency of Financial Institutions