Principles of Cross-Border Insolvency Law – and their Value for Judges and Legislators

I. Introduction

This paper gives a very short summary of my forthcoming book (Principles of Cross-Border Insolvency Law, Intersentia 2017).  It deals with a fascinating question: what are the underlying principles and the basic values of international (cross-border) insolvency laws, and how can they be used for the purpose of deciding cases, shaping statutes and further harmonising cross-border insolvency law?  Before answering this question, the term “principle” should be defined.  Principles are to be understood as fundamental and basic values underlying the rules of international insolvency law and simultaneously systemising the law, as well as legitimising the legal consequences of these rules.  Thus, they are to be distinguished from important topics (eg international jurisdiction), objectives of rules (eg to promote the proper functioning of the internal market of the EU) or solutions to legal problems (eg assigning the termination of employment contracts to the lex contractus instead of the lex fori concursus).

II. Groups of principles

By evaluating various cross-border insolvency laws, principles can be described and systemised into three groups.  First, international insolvency law is primarily framed by jurisdictional principles, which refer to the fact that cross-border proceedings affect the sovereignty of at least two different states.  Examples are the principles of 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.  The third group consists of substantive principles.  They reflect the impact of insolvency proceedings on substantive legal positions.  Worth mentioning here are the principles of equal treatment of creditors, optimal realisation of the debtor’s assets, debtor protection, protection of trust (for secured creditors or contractual partners), social protection (for employees or tenants).

III. Principle-based approach

Against this background, we can proceed to outline the value of principles for judges and legislators.  Starting with the use of a principle-based approach in case law, the judgments of the Supreme Court of Canada in Holt Cargo Systems Inc v ABC Containerline NV (Trustee of) [2001] 3 SCR 907 and Antwerp Bulkcarriers NV v Holt Cargo Systems, Inc [2001] 3 SCR 951 are good examples.  Antwerp Bulkcarriers was a Belgian company facing Belgian insolvency proceedings.  The company owned a ship and American stevedores attached a lien under US maritime law to this ship.  The ship sailed to Canada, where the stevedores opened Canadian admiralty proceedings.  The Belgian administrator sought for the ship to be turned over to him.  A principle-based approach would start from the principles of unity, priority and universalism, claiming that the Belgian insolvency proceedings, opened prior to the Canadian proceedings, have worldwide effect.  The principle of cooperation and communication requires the Canadian authorities, including the courts, to support the Belgian insolvency proceedings by handing over the assets situated in Canada, and under the principle of mutual trust, the Canadian authorities should trust in the fairness and appropriateness of Belgian insolvency law and insolvency proceedings.  Instead, the Supreme Court of Canada denied the application, stating that foreign bankruptcy law should “faithfully mirror the provisions of Canadian bankruptcy law”.  Protection of secured creditors was “a strong policy in the Canadian bankruptcy scheme”, and international coordination of insolvency proceedings was “an important factor, but not necessarily a controlling factor”.  This clearly displays an unsavoury reversion to territorialism and is not compatible with the principles of modern cross-border insolvency law.

As to the value of principles for legislators, a good example is the treatment of security rights in rem in cross-border insolvency law.  According to Art 8(1) of the European Insolvency Regulation (EIR) (recast), the “opening of insolvency proceedings shall not affect the rights in rem of creditors or third parties in respect of tangible or intangible, moveable or immoveable assets (…) which are situated within the territory of another Member State (…)”.  It is common ground nowadays that this must be interpreted as exempting security rights from the application of both domestic and foreign insolvency law.  The background is that the national insolvency laws of EU Member States respect security rights but have diverging rules on usage, disposal and realisation of encumbered assets and provide for the sharing of costs inherent to realisation of the collateral with the secured creditor in different ways. Hence, Recitals 67 and 68 EIR, also utilised by the CJEU in Erste Bank Hungary (Case C-527/10 ERSTE Bank Hungary Nyrt v Magyar Állam and Others, ECLI:EU:C:2012:417), justify Art 8 EIR with the principles of predictability (or legal certainty) and protection of trust.  However, a closer look reveals that more than two principles are at stake.  Some oppose the solution found in Art 8(1) EIR: this norm infringes the principle of universalism (as it cuts back on the worldwide effects of insolvency proceedings), the principle of equal treatment of creditors (as it treats creditors with assets in the opening state different to those with assets abroad), procedural justice (as it discriminates against domestic secured creditors) and optimal realisation of the debtor’s assets (if, for example, the lex fori concursus reserves a prescribed part of the proceeds for the insolvency estate).  Other principles seem to support Art 8(1) EIR, particularly the principles of predictability (legal certainty), protection of trust and efficiency.  However, a closer look creates doubt.

Starting with the principle of predictability, it can be said that every clear rule grants legal certainty.  Assigning rights in rem to the lex fori concursus, which would be the solution required under the principle of universalism, is a good example of a clear rule.  As for the principle of efficiency, assigning rights in rem to the lex fori concursus may be less efficient as regards negotiations when granting the credit.  However, internationally active lenders are mostly banks, which keep themselves up to date regarding the laws of the countries in which they do business.  Furthermore, once proceedings are opened, they can be administered more efficiently if the same insolvency law applies to all security rights (domestic as well as foreign).  Hence, assigning foreign rights in rem to the lex fori concursus would not be a hindrance to the principle of efficiency but would rather enforce it.  Finally, referring to the principle of protection of trust is also ultimately not convincing.  Under this principle, only legitimate expectations can be protected, and the expectation not to be affected by the proceedings at all is not legitimate.  Trust in the application of the lex situs is not legitimate either.  The secured creditor knows that he is granting credit to a foreign debtor; hence the opening of foreign proceedings under foreign law should not come as a surprise.  In any case, the mere fact that the collateral is situated abroad is no reason to create an exception.  Moreover, Art 8 EIR identifies the wrong point in time by placing its focus on the opening of the proceedings.  This approach neglects the fact that trust is invested ex ante (when creating the right in rem) and not ex post (when proceedings are opened).  In summary, the solution should be to declare the lex fori concursus applicable.

The last issue to be addressed is the benefit of a principle-based approach to harmonisation.  There is a broad consensus that harmonisation of national insolvency laws is necessary, and principles can support harmonisation.  Approaching cross-border insolvency law not through the lens of the issues at hand, but rather from the perspective of the principles involved, would give rise to three steps in the negotiation process.  The first, rather abstract and probably easiest step would be to identify these principles.  The impact of an agreement regarding the principles on further negotiations should not be underestimated.  Parties have experienced that they are able to achieve common results through reaching an agreement on the appropriate course of action (a principle-based approach) as well as the relevant principles.  This experience could encourage them to proceed to further (probably more controversial) levels.  The second step would be to identify the issues by starting from the principles and identifying the rules which are required to enforce these principles.  The harmonisation process will presumably not be hampered on this level, since the task at hand is simply to compile a list of the subjects which must be regulated according to a principle-based point of view.  However, on a third level, principles can also help with finding solutions to the issues, as I have tried to illustrate with regard to the treatment of rights in rem.

All in all, a principle-based approach can have various effects.  First, it can support mutual trust.  If the parties to the harmonisation process find their laws to be based on the same principles, they will probably be less reluctant to trust in the fairness and appropriateness of foreign law and foreign proceedings.  Second, this can also support the willingness to accept other states’ claims for universalism and to waive territorialistic provisos.  Third, agreeing on common principles can also support the acceptability of solutions, as they can then be traced back to the underlying basic values.

Finally, the assessment above begs the question: is this all wishful thinking?  Surely, during a realistic assessment of harmonisation proceedings, one cannot close one’s eyes to the fact that parties negotiating harmonised laws will encounter difficulties in attempting to apply the principle-based approach in a pure manner.  Besides technical problems, which pose a challenge even for benevolent legislators, “local interests”, territorialistic motives and a distrustful attitude towards foreign laws will disturb negotiations at least somewhat and will hamper the process of reaching an agreement on a principled solution.  Nevertheless, insisting on using principles as guidance may at least help identify these distracting influences and may expose them as irrelevant and unhelpful.  Furthermore, discussion on a principle-based level may unveil new perspectives.  It may enable parties “to acclimate to the extraterritorial reach of foreign laws” (Pottow, 45 (2005) Virg J Int’l L, 935, 1011) and to agree on a method which focuses on basic values rather than personal interests.  This hope is supported by the fact that the principle-based approach is a neutral method, which is not rooted in methodological nationalism and thus may be more acceptable in the context of international harmonisation proceedings.