The Future of Cross-Border Insolvency: Overcoming Biases and Closing Gaps
Cross- border (international) insolvency law attempts to regulate the treatment of financial and economic distress of debtors who have presence in or connection to more than one country. In recent decades, particularly following the 2008 global financial crisis, the challenges of addressing cross- border insolvency effectively have been highlighted in domestic, regional, and international policy considerations and reform agendas. In The Future of Cross-Border Insolvency: Overcoming Biases and Closing Gaps (Oxford University Press, 2018), I explore the key theoretical and practical developments in this field regarding both commercial en¬tities and financial institutions, from a broad inter-disciplinary perspective to provide insights about the future of cross-border insolvency and how the system can be improved going forward.
The prevailing approach for cross-border insolvency to date is ‘modified universalism’, which has emerged as a set of norms shaped by a reality in which insolvency cases may take place within a large market and regarding different types of entities. These norms prescribe efficient, and therefore varying, levels of centralization of the process and cooperation in cross-border insolvency proceedings. They also require a global approach and global responsibility, with duties imposed on home and host countries concerning implicated stakeholders and entities. A significant surrender of control and deference to foreign proceedings is envisaged in cases where, from a global perspective, this represents the most efficient and fair approach. Modified universalism is still somewhat fragile, however, and is often regarded as a trend, a general principle, or an interim solution. Even though it is a dominant doctrine, it has still not been adopted universally. It is also weakened by instances where countries and their implementing institutions express territorialist inclinations. This raises the question of whether deviations from modified universalism represent true preferences, whereby a more territorialist approach is desirable at least by some countries, or whether there are also other factors likely contributing to a territorialist inclination that the international system may be able to address.
The standard economic assumption is that decision-makers evaluate risks accurately, and that accordingly, they can maximize their expected utility, making choices based on probability calculations. Behavioural theories and experiments have shown, however, bounds on decision-making in real-world circumstances in the form of recurrent biases. The emerging field of behavioural international law is further shedding new light on the relevance of extant bounds on decision-making in international law and regarding choices and decisions of countries and implementing institutions. Against this backdrop and taking account of the demands of modified universalism and the nature of cross-border insolvency, I argue that it can be expected that territorialist inclinations are affected by biases. Notably, ‘loss aversion’ (exaggeration of losses compared to gains), status quo (aversion to change) and related effects, as well as short-termism (bounds on will-power) may all contribute to territorialist tendencies. I argue, therefore, that the cross-border insolvency system has a ‘debiasing’ role where, through adoption of certain strategies and tools, it may be able to align choices with optimal solutions.
One such tool I consider in the book is customary international law (CIL). CIL is a key legal source that fills gaps in international treaties, influences treaty regimes, regulates areas not covered by treaties or by other instruments or regarding countries that are not parties to a treaty or to another regime. If modified universalism is elevated from a general approach to CIL, it can also assist in the areas where biases impede progression to more optimal solutions. CIL applies regardless of whether rules have been codified domestically or through treaties, and non-objection is considered a consent to CIL. Once there is evidence of a general practice accepted as law, modified universalism will be the default universal rule, embraced as an opt-out regime. Such use of legislative framing can address status quo tendencies, loss aversion and inaction, and can result in higher participation in a regime based on modified universalism. The creation of CIL requires, however, a reconceptualization of the position of modified universalism as a standalone approach (delinked from pure universalism), and a greater emphasis of the international role of cross-border insolvency.
CIL has important limitations. It is also undoubtedly imperative that cross-border insolvency norms are translated into technical rules in written international instruments. The general view in the field of cross-border insolvency has been that a global treaty is the ultimate ideal, reflecting the aspiration to eventually reach a purely universalist system. Other ‘softer’ instruments, including the UNCITRAL Model Law on Cross-Border Insolvency, are therefore generally viewed as interim measures. A broader analysis of instrument choice, informed by international law theory and practice, shows, however, that the assumption that treaties represent hard, binding, law, while non-treaty instruments are non-binding soft laws, requires a reconsideration. Furthermore, economic analysis of international law, reinforced by behavioural perspectives, highlights the disadvantages of treaties, especially where they attempt to regulate complex problems among multiple participants. The so-called soft law instruments that are utilized in various international law subsystems may in fact be ‘harder’ than a treaty. Specifically, a model law approach can possess the characteristics of hard law, while retaining flexible features that induce participation.
Even with strong norms and effective instruments, compliance is not guaranteed. Indeed, compliance is a major challenge in international law. Economic analyses of international law emphasize reputational concerns as well as other incentives or sanctions that may encourage reciprocal behaviour. I explore the effectiveness of various types of incentives and suggest certain tools that can strengthen reputation as a driver of compliance by taking decision-making constraints into account. I also explore the interrelation between compliance and problems of institutional and regulatory capacity, to reveal the role of capacity building, and propose the sort of targeted harmonization and targeted delegation to external bodies that can support the cross-border insolvency system.
Finally, I assess existing international instruments, including the newer and ongoing developments of instruments concerning the cross-border insolvency of enterprise groups and the enforcement of insolvency-related judgments, highlighting possible challenges and remaining gaps. I also draw comparisons between the regime for commercial enterprises and the cross-border resolution regime applicable to financial institutions. Currently, the latter is largely informed by international standards and principles and supported by contractual approaches. However, the development of a model law covering these institutions more comprehensively is an achievable task; lessons can be learned from the way UNCITRAL instruments were developed, while accommodating the uniqueness of financial institutions.
Irit Mevorach is Associate Professor in Law at the University of Nottingham.
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