Institute for Law and Finance

Cross-Border Insolvency of Financial

Institutions

Zokirjon Abdusattarov
Zhaoji Wu

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Introduction: Why Is This Topic Important?

• The growth of multinational businesses in the twentieth century created the
possibility of transnational insolvencies.
• The legal rules governing insolvency law and practice are rooted deeply in the
legal traditions of individual countries. In part this arises because insolvency
law preempts and supersedes many rules of both substantive and procedural
law.
• The insolvency or reorganization of a multinational enterprise facing financial
difficulties 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 an
insolvency proceeding in one
country, with creditors located in at
least one additional country. In the
most complex case, it may involve
subsidiaries, assets, operations, and
creditors 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-Border

Insolvency
• Multinational insolvency proceedings frequently result in competing interests
among the jurisdictions involved. The two dominant models for addressing
international insolvency problems are universality and territoriality.

• Under the universality approach, toward which U.S. courts are moving, an
international insolvency case is treated, insofar as possible, as a single case
and 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 assets
located within its jurisdiction and disregards any parallel proceedings in a
foreign nation.
• The court uses "local assets to satisfy local claimants in local proceedings with
little regard for proceedings or parties elsewhere.... “
• Territoriality takes the pessimistic view that local claimants ultimately will not
receive their fair share of the assets in a foreign insolvency. Consequently,
under this approach a local court must provide for these creditors as well as
possible, 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 legal
regime 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 and
distribution of assets cannot be accomplished, and asset waste and turmoil are
certain 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 proceedings
•Directive 2001/17/EC on the reorganisation and winding-up of insurance
undertakings
•Directive 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) with
regard 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 Article
67 provides that a European Company will be treated as a public limited company in
accordance 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 competent
authorities 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 insolvencies
that protects the interests of all creditors and other interested
persons, including the debtor;
• (d) protection and maximization of the value of the debtor's
assets; and
• (e) facilitation of the rescue of financially troubled businesses,
thereby protecting investment and preserving employment.

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The Model Law covers the following

procedural issues:
• inbound requests for recognition of a foreign insolvency
proceeding;
• outbound requests for assistance from a foreign State in connection
with a proceeding in the enacting State under its laws relating to
insolvency;
• requests for coordination of insolvency proceedings taking place
concurrently in a foreign State and the enacting State in respect of
the same debtor; and
• participation by foreign creditors or other interested parties in
proceedings occurring in the enacting State.

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Drawbacks of the Model Law

• The Model Law is not the ultimate step in international
cooperation in insolvency cases. It leaves unresolved many
difficult legal issues. Notably, the Model Law has no provision to
govern conflict-of-laws and choice-of-law issues.
• Financial Groups or Business Enterprise Groups are not
regulated.
• 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 to
proceedings concerning such entities as banks or insurance
companies, that are subject to a special insolvency regime in this
State.

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Principal Provisions of the EC Insolvency

Regulation:
• 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 some
specific 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 May 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 responsible
for 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 up by banks in other Member States, 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 Arrangements 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 effects
of 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 office
and 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 on
insolvency proceedings, whereby the centre of main interests of
that subsidiary is situated in the MS where its registered office is
situated, 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 which
location at that registered office is deemed to reflect.

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Thank You!

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