THE PAST TWO DECADES or so have witnessed global economic integration at an unprecedented rate. As a result, there has been a huge increase in the number of companies that operate on a cross-border basis. Companies operate on a cross-border basis in many ways, including through investing and owning assets in other jurisdictions and through establishing trading and other commercial relationships with parties in other jurisdictions. When companies operate on a cross-border basis, it is inevitable that the laws of two or more jurisdictions will apply to their activities. This article outlines the challenges that arise in the context of cross-border insolvency proceedings and the steps that have been taken towards achieving cross-border co-operation between jurisdictions in this regard. It also examines the position under the law in mainland China.
Challenges arise when a company enters insolvency or bankruptcy proceedings in one jurisdiction – either on its own initiative or in response to an application by its creditors – and its restructuring or liquidation involves assets and creditors in another jurisdiction (for a discussion about the concept of bankruptcy or insolvency, see China Business Law Journal volume 4 issue 10: Bankrupt or insolvency). In such a situation, the courts and legal system in each jurisdiction confront a dilemma: Do they just concern themselves with the assets and creditors that are in their jurisdiction and ignore the assets and creditors in other jurisdictions, or do they recognize the assets and creditors in other jurisdictions and treat them as part of a single or universal process for restructuring or liquidating the company?
Each of these approaches has its perceived advantages and disadvantages. One advantage of the first approach – which is known as the territorial approach – is that the assets of the company in the relevant jurisdiction are used to repay local creditors in priority to foreign creditors and the local creditors do not need to worry about foreign creditors or what might happen in any other jurisdictions. A disadvantage of this approach is that it unfairly discriminates against foreign creditors and may jeopardise a restructuring of the company that would be in the best interests of all the creditors.
One advantage of the second approach – which is known as the universal approach – is that all creditors are treated equally and participate in a single proceeding, which is likely to be more efficient and cost-effective than having multiple proceedings in two or more jurisdictions. A disadvantage of this approach is that creditors in one jurisdiction may be prevented from taking unilateral action to recover their debts in their own jurisdiction, and may need to submit to the unfamiliar laws and procedures in another jurisdiction.
It is generally accepted that the second approach is the better approach – at least in theory – as it produces better outcomes for all parties, including the company and its creditors. However, a critical question that arises in this regard is how to design a cross-border insolvency framework that enables all creditors of the company to participate in the proceedings and recover their debts in a fair and orderly manner. A related question is how to achieve the necessary co-operation and assistance between the courts in two or more jurisdictions to implement this approach effectively.
If a jurisdiction adopts the universal approach, it may do so in a variety of ways. In some jurisdictions, for example, the courts have inherent powers to recognize and assist foreign insolvency proceedings based on principles such as comity between nations, and reciprocity. In other jurisdictions, the position is governed by legislation that identifies certain jurisdictions that are to be recognized for this purpose. Increasingly, jurisdictions are enacting domestic legislation based on the Model Law on Cross-Border Insolvency published by the United Nations Commission on International Trade Law (UNCITRAL).
UNICTRAL is a body that has the mandate of removing legal obstacles to international trade and harmonizing the law in areas such as international commercial dispute settlement, electronic commerce, insolvency, international payments, sale of goods, transport law, procurement and infrastructure development.
As an additional step for strengthening and facilitating co-operation in cross-border insolvency proceedings, the courts in some jurisdictions have entered into judicial co-operation arrangements.
A former partner of Linklaters Shanghai, Andrew Godwin teaches law at Melbourne Law School in Australia, where he is an associate director of its Asian Law Centre. Andrew’s new book is a compilation of China Business Law Journal’s popular Lexicon series, entitled China Lexicon: Defining and translating legal terms. The book is published by Vantage Asia and available at www.vantageasia.com.