Theories of Cross-Border Insolvency

Cross-border insolvency exemplifies the usual characteristics of the conflict of laws process16. A number
of issues arise in dealing with cross-border insolvency and indeed most areas of law involving Private
International Law. These are as follows17:

• Whether courts of a given country can legitimately exercise jurisdiction over a particular case;

• If so, what law is to apply; - Either in the form of specially formulated provisions of the law of the
forum in question or; - Through the operation of the choice of law process;

• Whether the validity of foreign judgments may be recognised.

There are a number of theories revolving around cross-border insolvency, with an attempt to explain the
operation of this area of law. One is the theory of Unity18. This states that in the case of cross-border
insolvency, all courts, foreign, national and local, must defer to the authority having the jurisdiction over
the locale where the company is situated or incorporated19. Of course, this would not apply with
reference to nations governed by a treaty providing for the determination of jurisdiction of the matter at
hand.

A variation of the theory of Unity occurs when a number of concurrent winding up proceedings are
underway in different jurisdictions20. There exists and is recognised a main proceeding, either dealing
with the actual winding up process or with regard to the disbursement of assets and a number of other,
ancillary proceedings related to the same matter, usually with regard to assets owned within the
jurisdiction of the peripheral authorities. This is known as the principle of Plurality as opposed to that of
Unity.

There is also the principle of Universality, which states that the winding up process extends not only to
the assets located in the jurisdiction in which the insolvent is located or incorporated but also its assets
all over the world21. This is applicable to both the theories of Unity and Plurality as with the theory of
Unity, along with jurisdiction over the matter, the courts also hand over jurisdiction of the properties
belonging to the company in question22.

The introduction of the principles of unity and universality has resulted in a legal framework for cross-
border insolvency cases within the European Union under which a single set of insolvency rules can
apply to the enforcement of all creditors’ claims, and decisions of the competent authority have
universal application. The Insolvency Regulation and the two Directives do not seek to harmonise
national legislation concerning reorganisation measures and winding-up proceedings, rather they ensure
mutual recognition and coordination of these procedures by member states. The principles of home
country control, minimum harmonisation and mutual recognition - forming the core of the market
integration principles for financial markets - have also been transposed in the field of insolvency
procedures and constitute the basis of the Winding-up Directive for insurance undertakings and the
Windingup Directive for credit institutions. In particular, the home country and mutual recognition
principles - being introduced by the First and Second Banking Co-ordination Directives,46 respectively -
are extended to the insolvency of credit institutions