2.2.2. Plurality of Insolvency

If insolvency proceedings operate only territorially, it is in principle possible - and

Irom an insolvency law perspective necessary - to commence separate proceedings

in any jurisdiction where a part of the debtor's estate is located."™ However, the fact

that, at least in theory, the entire debtor's estate could be subject to one or the other

insolvency proceeding, preventing individual creditor action, does not in itself improve

the situation.

From the c o m m o n pool point of view, separate insolvency proceedings do not allow

for collective, co-ordinated efforts. In fact, plurality of insolvency is little more than

individual states (rather than creditors) breaking up the debtor's estate. The result,

however, is the same. 'Grab-rule' tactics produce collectively sub-optimal results, as

the chance is lost to preserve and enhance value through collective efforts at deployment."'

1 d o i n g concern value may be reduced or lost where important parts of a

business are located in different jurisdictions and subject to separate proceedings:

'fragmented reorganisational processes, particularly those that are also jurisdictional! y

fragmented, are ultimately self-defeating'.

Section (Inc. Modern Oross-liorder Insolvency Regulation

Prom Struggle to (a)-operation

proceedings in a single forum will requite all creditors to file their claims against the

debtor in that forum. Although formal discrimination is no longer part of most national

cross-border insolvency laws, unity ot lorum may nevertheless tie fiicto impose

an unequal burden on foreign creditors.

Foreign creditors will face significantly higher costs pursuing their claims in a foreign

court than domestic creditors will. Again, the larger multinational creditors may be

able to overcome this obstacle, but for many smaller creditors these costs may effectively

preclude them from participating in the proceedings. As this latter group ot

creditors includes those who are already considered in need ot protection in the event

of insolvency, this inequality may be judged to be particularly serious. The element

of inequality may be reinforced by rules relating to publication of the judgment commencing

proceedings, notification ofcreditorsand time-bars tor filingofclaims, which

do not necessarily take adequate account of the interests of loreign creditors. "

One example, in which concerns of this kind have led to rejection of universality in

favour of territoriality, is early United States cross-border insolvency law.1 1 At the turn

of the 19th century, trade with the United Kingdom was substantial. However, the

means of transport and communication, as well as the (political) relationship between

the two countries, was poor. Bailey suggests that this must have been the underlying

rationale for United States courts refusing to accord comity to English proceedings,

to the detriment of American creditors. Instead of requiring American creditors to

participate in proceedings across the Atlantic, courts allowed these creditors to have

recourse against local a s s e t s . " v

J. .\ J. Unity of Insolvency Law

The principle of universality implies unity of l a w - t h a t all questions of insolvency law

are governed by the law of the forum. Accepting unity of law under the principle of

universality requires states to surrender to foreign notions ol optimal deployment and

equitable distribution.1 Moreover, it may lead to a significant rise in the cost of credit.

 ( fiapter Two. Principles of Cross Border Insolvency and

the Struggle over Jurisdiction

Unity ot law implies that the lex fori concursus decides what exactly constitutes

'optimal' deployment and by what means that result is to be obtained. However,

states may normativelv be diametrically opposed on this point. Insolvency laws in

states such as France, which take account of social costs, essentially impose a

'bankruptcy tax' on creditors. Under unity of law, states would be required to accept

that foreign 'tax' for their creditors, resulting in a net transfer of wealth. 'The recognising

state and its creditors would pay for the protection of the interests of the foreign

forum concursus (employment, industrial or economic infrastructure). Conversely,

allowing self-interested creditors to decide on the question of deployment, where such

interests may be at stake in the recognising state, may be equally unacceptable.

With unity ot law, the distributional scheme is also provided by the lex fori concursus.

However, the fairness of this scheme does not automatically apply to foreign

parties/creditors. For instance, it insolvency proceedings were opened in Germany

there is no obvious reason (pari icularly from a French point of view) why an employee

under a contract governed by French law would receive fair treatment if given the

priority German insolvency law accords to employees.1 1 As priorities are often accorded

to exactly those creditors who are considered in need of protection, states may

feel compelled to ensure that equivalent protection to that offered under its own law

is available. Moreover, not all claims may in fact be recognised under the lex fori

concursus. This is particularly true for claims arising under public law, such as taxes.

Again, states may consider it necessary to ensure that these creditors at least have

recourse to local assets under local law.1 Conversely, states may find it unacceptable

to force their creditors to file in foreign proceedings and compete with large public

claims (revenue) arising under the lex fori concursus - all the more so where those

claims may receive a high priority in insolvency proceedings.

Even if these normative discrepancies could be avoided or were to be accepted, unity

ot insolvency law would further result in a significant increase in transaction costs and,

as a consequence, in the price ot c r e d i t . ' - ' In some transactions, the costs of the possible

I From Struggle to Co-operation

insolvency at one of the parties may be relevant at the time of concluding the

transaction. Parties may desire to internalise the costs of insolvency in the transaction

itself;1 1 in other words, the ex post event of insolvency produces ex ante costs tor transactions.

The traditional method ol reducing the risks and costs ol insolvency is to

demand security for credit extended to a debtor. However, the strength of a security

right and the protection against insolvency offered by it. depend on whether (and it

so how) the rights of the secured creditor are affected in the event ot the debtor's

insolvency. As pointed out above, insolvency may affect both the exercise and the

substance of security rights.'~' Under unity of law, these effects are not determined

bv the law governing the security right, but by the lex fori amamiis. Consequently,

creditors have to take account of two sets of legal rules: the law governing their

transaction and the law of insolvency. This may burden transactions considerably. The

costs involved in obtaining sufficient information as to how a foreign insolvency law

would affect a particular security right are likely to be significant. 1

The argument is sometimes framed in different terms. The application ot the lexjori

eoneiirsus under unity of law would interfere with the 'legitimate expectations' of

creditors. The reference to legitimate expectations is somewhat ambiguous. It

presupposes that creditors may in fact legitimately expect the application of local

insolvency law in the adjudication of their rights. But this is exactly what the principle

of universality and unity of law deny. Assuming that the universal torn m is predictable,

there is no reason for parties to look anywhere else than the law ol that torum to

determine the effects of insolvency. Strictly speaking, there is no interference with

legitimate expectations; rather, it may be necessary to incur higher costs to get those

expectations right.

The informational costs are exacerbated to the extent that the jurisdictional question

is not effectively controlled. If the forum that has jurisdiction is unpredictable, so is

the lex fori eonairsus. And, as under unity of law it is the law of the forum that governs

insolvency and its effects, creditors will not be able to ascertain the ettects of insolvency.

Consequently, as long as there is no international consensus on the isstie ot

jurisdiction, creditors are faced with a source ot uncertainty, which leads to additional

costs on transactions. The only way to avoid this uncertainty would be for creditors

to take into account all jurisdictions in which insolvency proceedings could potentially

be opened and attune their transaction to the least favourable lex fori conairstts. Under

those circumstances creditors would be forced to base their transaction on a worst-case

scenario.1