WEEK01 - Wessels, Markell and Kilborn (2009), Chapter 3 – Guiding approaches to
international insolvency law
Topic Page
The law favors the collective interests of creditors and perhaps society at large at the 39
expense of individual creditor rights collective compromise
Collective compromise enjoys almost unanimous acceptance by nations as applied to 39
insolvencies contained within their borders, but with regard to international insolvencies,
many nations abandon their support for collective compromise.
Nations are less willing in general to subjugate the interests of “local” creditors to a
broader compromise with “foreign” creditors and other constituencies involved in an
international insolvency.
Many jurisdictions treat assets located within their national borders as if they were
reserved for creditors within their borders.
In recent years, more and more nations have begun to consider and even dedicate 40
themselves legally to a more principles coordination of international insolvencies.
In recent years a degree of willingness to consider a cooperative alternative to the
individualistic historical approach has swept over the international insolvency landscape
Territorialism vs. universalism balance of the competing interests of local protection vs. 40
international cooperation
Territorialism/territoriality assets physically or constructively within the sphere of a 40
particular state’s territorial jurisdiction were viewed as being within the exclusive province
of the insolvency courts and laws of that particular jurisdiction
Nature of insolvency law: inherently collective, compromising, value-maximizing there
is a need for coordination of assets and competing interests weighs in favor of forcing
local sacrifice to favor international compromise for the greatest collective of good, but
the alternative has powerful historical and emotional appeal.
Historically states have treated the international implications of the insolvency of a
transnational enterprise in a simple way: by ignoring them.
Under the territorial approach, only claims somehow deemed to have arisen within the 41
national territory of the relevant jurisdiction can be included on the list of potential
beneficiaries of any distribution of the value of the debtor’s local assets.
Foreign creditors in a strictly territorial approach are excluded entirely, even if they have
the physical and financial resources to lodge and pursue a claim in the local insolvency
case.
asset value in territorialist jurisdictions is allocated by reason of the physical or
constructive location of assets at the moment of the insolvency filing.
If more than one such insolvency case is initiated in different states, each case proceeds in
parallel, generally with no regard for – or in defiance of – proceedings in other states.
Territorialism is also called ‘the grab rule’ 42
Territorialism inhibits or prevents collective compromise 42
Two approaches to territorialism 41,
42
Territorialism sovereignty argument in favor of territorialism 43
,Sovereignty promotes three principles: democratic accountability, democratic legitimacy, 43
and the preservation of distinctive cultural identities and creative competition among
multiple sovereign rule systems.
Democratic accountability when power rises to the international level, the ultimately 43
affected parties’ access and influence are diluted, if not destroyed.
To whom can an aggrieved citizen complain if an international power undermines
important rights?
Democratic legitimacy as the power base expands to the world stage, democratic 44
legitimacy is affected.
Cultural preferences territorial approach avoids sacrificing unique and cultural 44
preferences.
Universalism and market symmetry 48
If a unified procedure coordinated by one central authority is a universally acknowledged
necessity, that same standard should apply in international cases.
In its purest form, one worldwide court would apply one set of insolvency laws to all 49
international insolvency cases
The realistic approach: legally mandated cooperation among national insolvency courts 49
and deference to one representative court applying one set of rules modified
universalism (see e.g., recital 22 EIR 2015)
Choice of forum and choice of insolvency law 49
Weighing the advantages and practical impediments of the competing approaches 50
for modified universalism to be widely accepted, it needs to be practical
Predictability and prevention of forum shopping, recital 4 EIR 2015 50
Predictability advantages in terms of the cost of credit 51
Predictability is hard to come by in an inherently chaotic system like insolvency, only a
narrow range of creditors are likely to enjoy the advantages of predictability.
Center of main interests (COMI) vs. lex loci rei (location of assets) 51
Rules for choosing the applicable law are always subject to some level of manipulation, but
the center of main interests (COMI) has emerged as a moderately clear and certainly no
more ambiguous and manipulable alternative to the traditional lex loci rei (location of
assets) standard.
Corporate groups pose serious challenges for universalism (because of ‘artificial’ 52
boundaries).
Corporate groups pose significant challenges to territorialism as well (but is at least no 53
more effective than universalism)
Upholding legitimate expectations: “vested interests” and fairness 53
Both domestically and internationally, an expectation that local assets will be applied to 55,
local claims is simply unjustified. 54
Such creditors should expect that their insolvency claims will be only part of a worldwide
collective of claims, and the debtor’s “local” assets will be collected in a common pool for
satisfaction of all claimants.
The fairest way to protect all creditors, including tort victims, employees and other “non-
adjusting and weakly adjusting” creditors, is to ensure that their recovery in every
, insolvency case is based on a collective evaluation of all claims and assets in the case.
Territorialism offers no protection against the arbitrary extraterritorial movement of assets
pre-insolvency, while universalism renders such movement largely irrelevant and
harmless.
Minimizing losses ad transaction costs, maximizing value 57
States will most likely be attracted to universalism by the related promise of “rough wash”
and “transactional gain”.
Increased cooperation should most often result in an aggregate transactional gain – a
larger pie in each insolvency case to be distributed to local and foreign interests alike.
Territorialism parallel proceedings expensive 58
Universalism ancillary proceeding is cheaper and simpler
Second, a coordinated, unified administration of all of the debtor’s assets will facilitate in
most cases the maximization of value that lies at the heart of insolvency policy
Territorialism will have the effect of dismembering the enterprise, destroying asset value
The macro gains of cooperation should in many, if not all, cases outweigh the micro losses 59
to individual favoritism
Alternatives; Strengthening universalism 60
Multilateralist regime jurisdiction-selection: resolving choice-of-law issues in
international insolvency cases.
Cooperative territorialism: every state has jurisdiction over all assets located in it, but 62
where cooperation is appropriate, national courts should communicate and collaborate.
At least for the time being, unadulterated universalism remains a theoretical illusion. 62
Mixing universalism and territorialism 63
Choice of law contractualism 64
Modified universalism 67
The essential difference among all variations of the two concepts of territorialism and
universalism is one of perspective. Universalist approaches take a worldwide perspective,
trying to get as close as possible to a universalist solution (one court applying one set of
laws to the entirety of the insolvency process), while territorialist approaches proceed
from the starting point of protecting the “vested interests” of local creditors, with the
sovereign cooperating only to the extent that cooperation does not jeopardize this primal
goal.
Wessels Part I, (2015) § 1.3 - §1.7.5 [para. 10032-10079]
Historical notes, historical data, treaties 30-33
Forms of recognition: several countries permit a foreign administrator or 33
liquidator to request the recognition of insolvency proceedings, to which he has
been appointed, by means of an exequatur (an official recognition by a
government of a consul, agent, or other representative of a foreign state,
authorizing them to exercise the duties of office). If provided, entrance to the
jurisdiction of that respective state is given in order to facilitate, for example,
the transfer of the insolvent debtor’s goods located in that jurisdiction to the
foreign insolvency proceedings.
[see for reference recital 7 and 8 UNCITRAL]
international insolvency law
Topic Page
The law favors the collective interests of creditors and perhaps society at large at the 39
expense of individual creditor rights collective compromise
Collective compromise enjoys almost unanimous acceptance by nations as applied to 39
insolvencies contained within their borders, but with regard to international insolvencies,
many nations abandon their support for collective compromise.
Nations are less willing in general to subjugate the interests of “local” creditors to a
broader compromise with “foreign” creditors and other constituencies involved in an
international insolvency.
Many jurisdictions treat assets located within their national borders as if they were
reserved for creditors within their borders.
In recent years, more and more nations have begun to consider and even dedicate 40
themselves legally to a more principles coordination of international insolvencies.
In recent years a degree of willingness to consider a cooperative alternative to the
individualistic historical approach has swept over the international insolvency landscape
Territorialism vs. universalism balance of the competing interests of local protection vs. 40
international cooperation
Territorialism/territoriality assets physically or constructively within the sphere of a 40
particular state’s territorial jurisdiction were viewed as being within the exclusive province
of the insolvency courts and laws of that particular jurisdiction
Nature of insolvency law: inherently collective, compromising, value-maximizing there
is a need for coordination of assets and competing interests weighs in favor of forcing
local sacrifice to favor international compromise for the greatest collective of good, but
the alternative has powerful historical and emotional appeal.
Historically states have treated the international implications of the insolvency of a
transnational enterprise in a simple way: by ignoring them.
Under the territorial approach, only claims somehow deemed to have arisen within the 41
national territory of the relevant jurisdiction can be included on the list of potential
beneficiaries of any distribution of the value of the debtor’s local assets.
Foreign creditors in a strictly territorial approach are excluded entirely, even if they have
the physical and financial resources to lodge and pursue a claim in the local insolvency
case.
asset value in territorialist jurisdictions is allocated by reason of the physical or
constructive location of assets at the moment of the insolvency filing.
If more than one such insolvency case is initiated in different states, each case proceeds in
parallel, generally with no regard for – or in defiance of – proceedings in other states.
Territorialism is also called ‘the grab rule’ 42
Territorialism inhibits or prevents collective compromise 42
Two approaches to territorialism 41,
42
Territorialism sovereignty argument in favor of territorialism 43
,Sovereignty promotes three principles: democratic accountability, democratic legitimacy, 43
and the preservation of distinctive cultural identities and creative competition among
multiple sovereign rule systems.
Democratic accountability when power rises to the international level, the ultimately 43
affected parties’ access and influence are diluted, if not destroyed.
To whom can an aggrieved citizen complain if an international power undermines
important rights?
Democratic legitimacy as the power base expands to the world stage, democratic 44
legitimacy is affected.
Cultural preferences territorial approach avoids sacrificing unique and cultural 44
preferences.
Universalism and market symmetry 48
If a unified procedure coordinated by one central authority is a universally acknowledged
necessity, that same standard should apply in international cases.
In its purest form, one worldwide court would apply one set of insolvency laws to all 49
international insolvency cases
The realistic approach: legally mandated cooperation among national insolvency courts 49
and deference to one representative court applying one set of rules modified
universalism (see e.g., recital 22 EIR 2015)
Choice of forum and choice of insolvency law 49
Weighing the advantages and practical impediments of the competing approaches 50
for modified universalism to be widely accepted, it needs to be practical
Predictability and prevention of forum shopping, recital 4 EIR 2015 50
Predictability advantages in terms of the cost of credit 51
Predictability is hard to come by in an inherently chaotic system like insolvency, only a
narrow range of creditors are likely to enjoy the advantages of predictability.
Center of main interests (COMI) vs. lex loci rei (location of assets) 51
Rules for choosing the applicable law are always subject to some level of manipulation, but
the center of main interests (COMI) has emerged as a moderately clear and certainly no
more ambiguous and manipulable alternative to the traditional lex loci rei (location of
assets) standard.
Corporate groups pose serious challenges for universalism (because of ‘artificial’ 52
boundaries).
Corporate groups pose significant challenges to territorialism as well (but is at least no 53
more effective than universalism)
Upholding legitimate expectations: “vested interests” and fairness 53
Both domestically and internationally, an expectation that local assets will be applied to 55,
local claims is simply unjustified. 54
Such creditors should expect that their insolvency claims will be only part of a worldwide
collective of claims, and the debtor’s “local” assets will be collected in a common pool for
satisfaction of all claimants.
The fairest way to protect all creditors, including tort victims, employees and other “non-
adjusting and weakly adjusting” creditors, is to ensure that their recovery in every
, insolvency case is based on a collective evaluation of all claims and assets in the case.
Territorialism offers no protection against the arbitrary extraterritorial movement of assets
pre-insolvency, while universalism renders such movement largely irrelevant and
harmless.
Minimizing losses ad transaction costs, maximizing value 57
States will most likely be attracted to universalism by the related promise of “rough wash”
and “transactional gain”.
Increased cooperation should most often result in an aggregate transactional gain – a
larger pie in each insolvency case to be distributed to local and foreign interests alike.
Territorialism parallel proceedings expensive 58
Universalism ancillary proceeding is cheaper and simpler
Second, a coordinated, unified administration of all of the debtor’s assets will facilitate in
most cases the maximization of value that lies at the heart of insolvency policy
Territorialism will have the effect of dismembering the enterprise, destroying asset value
The macro gains of cooperation should in many, if not all, cases outweigh the micro losses 59
to individual favoritism
Alternatives; Strengthening universalism 60
Multilateralist regime jurisdiction-selection: resolving choice-of-law issues in
international insolvency cases.
Cooperative territorialism: every state has jurisdiction over all assets located in it, but 62
where cooperation is appropriate, national courts should communicate and collaborate.
At least for the time being, unadulterated universalism remains a theoretical illusion. 62
Mixing universalism and territorialism 63
Choice of law contractualism 64
Modified universalism 67
The essential difference among all variations of the two concepts of territorialism and
universalism is one of perspective. Universalist approaches take a worldwide perspective,
trying to get as close as possible to a universalist solution (one court applying one set of
laws to the entirety of the insolvency process), while territorialist approaches proceed
from the starting point of protecting the “vested interests” of local creditors, with the
sovereign cooperating only to the extent that cooperation does not jeopardize this primal
goal.
Wessels Part I, (2015) § 1.3 - §1.7.5 [para. 10032-10079]
Historical notes, historical data, treaties 30-33
Forms of recognition: several countries permit a foreign administrator or 33
liquidator to request the recognition of insolvency proceedings, to which he has
been appointed, by means of an exequatur (an official recognition by a
government of a consul, agent, or other representative of a foreign state,
authorizing them to exercise the duties of office). If provided, entrance to the
jurisdiction of that respective state is given in order to facilitate, for example,
the transfer of the insolvent debtor’s goods located in that jurisdiction to the
foreign insolvency proceedings.
[see for reference recital 7 and 8 UNCITRAL]
