3 . 1 . THE E V O L U T I O N O F C R O S S - B O R D E R I N S O L V E N CY C O - O P E R A T I O N

It has been argued that in the field of cross-border insolvency it is unlikely for

unilateral state action to end spontaneously in an adequate level of co-operation.

According to Virgos not only creditors but also states behave s t r a t e g i c a l l y . A s a result

states relying on the economic account of insolvency law would not be willing to c o operate

(i.e. accept universality) with states taking a more open-ended view of

insolvency law. States with insolvency laws that take account of social costs impose,

so Virgos argues, what may be called a 'bankruptcy tax' on creditors. Co-operation

in insolvency might therefore result i n a net transfer of wealth to countries which have

adopted an open-ended view of insolvency law. Consequently, without a treaty or

similar instrument states would be likely to find themselves in a perpetual struggle

over jurisdiction.

There i s certainly some truth to this 'spill-over' effect of insolvency regulation. It was

clearly a concern for the English court in Felixstowe Dock 6- Railway Co. v U.S. Lines

Inc. and formed one of the reasons why co-operation was not forthcoming in that

c a s e . : ! " U.S. Lines (USE) had filed for Chapter 1 I proceedings in the United States.

It planned to reorganise by selling off its European operations and concentrating its

activities in North America. After commencement of the reorganisation proceedings

in the United States, English creditors obtained dMareva injunction, preventing USE

from transferring its English assets to the USA. USE subsequently applied for the

injunction to be lifted. In denying the application, Hirst | inter alia held that the

creditors would suffer substantial prejudice since the English assets would be used to

keep USE alive as a going concern in a manner from which the plaintiffs could obtain

little benefit, since the plan for reorganisation envisaged USL withdrawing from the

European market. 11

However, on closer examination Virgbs' analysis is not particularly convincing. For

instance, it is not clear why no co-operation exists between 'market-oriented' countries

inter a" or between "community-based' jurisdictions over time. Moreover, it is hard

to see why states would be interested in a treaty at all, as a treaty would do little more

than sanction the 'bankruptcy tax' and the transfer of wealth. In fact, if the crossborder

insolvency dilemma is viewed from the perspective of strategically-acting states,

it would seem that co-operation in insolvency was likely to emerge despite states'

general inability to agree on any treaty. Westbrook in particular has argued that if states

behave strategically, they should prefer a co-operative, i.e. uni versal 1st, over a n o n - c o operative,

i.e. territorialist, strategy. 1

He argues that under universality of insolvency law (in the sense of unity of insolvency

law) deference to the insolvency law of the foreign forum in the adjudication of

creditor entitlements implies a difference in outcome for creditors. States must be

willing to accept that their creditors will be treated differently by the foreign lex fori

conairsus than they would have been under local insolvency law. '' In any single case

this will depend on the debt/asset ratio in a particular jurisdiction. However, over time

the losses and benefits for local creditors, which would be the result of the universal

choice of law, should even out. [ 1 Of course, producing the same net results over time

would not alone induce states to enter into co-operation. However, universality

produces additional benefits. First, the value of the debtor's estate may be preserved

or enhanced. Secondly, universality would lead to 'benefits tor local citizens from the

increased flow of trade at lower transaction costs that would result from a coherent

system of transnational management of default'. '' Finally, although Westbrook

acknowledges the relativity of the argument, universality would 'make unequal distributions somewhat less unequal'.'; " Co-operation should therefore be the

dominant strategy for states.

Westbrook rephrases the cross-border insolvency dilemma as a Prisoner's Dilemma

game between states. In any given case of cross-border insolvency commenced in State

A, State B will have to make a choice between co-operation or not. If the debt-asset

ratio in State B is sufficiently skewed, it will not be in the interests of State B's creditors

to co-operate. Consequently, if the game is played only a single time, State B will have

no incentive to co-operate as maximum gain is received by territoriality. However,

game theory demonstrates that co-operation may nevertheless emerge if the game is

repeated (iteration).- If a game is played more than once, the net benefits to a state

of multiple co-operative plays may be greater than the one-off benefits of defection

in the single game. Defection eliminates these possible benefits as other players are

unlikely to co-operate in future games. Unlike most creditors, states are not single-time

cross-border insolvency players but face the prospect of being involved in the crossborder

insolvency game 'regularly' in the future. Consequently, as the benefits of c o operation

over time outweigh the benefits of defection in a single case, strategicallybehaving

states should opt lor co-operation under the 'shadow of the future'. IN

Although Westbrook's analysis goes a long way to show why cross-border insolvency

co-operation has evolved, it is not entirely satisfactory. The dominant co-operative

strategy of states has not become universality as envisaged by Westbrook. Co-operation

under the paradigm is of a far more open-ended and procedural nature. However,

this requires only a relatively small adjustment of the analysis.

Any game consists of the basic elements of players, their strategies and the pay-off from

the use of those strategies. ''' finder Westbrook's analysis only two strategies appear

to be available to states: either a state co-operates unconditionally under universality,

or it defects completely under territoriality. In contrast to the arguments put forward

by Westbrook, history shows that states do not assign the highest pay-off value to the

hlem, at 466. co-operative strategy of unconditional universality. " Under the two strategy games

of universality and territoriality, detection in the form of territoriality appears to be

the strictly dominant strategy, even under the shadow of the future. The result,

essentially, is that states will find themselves locked in the struggle over jurisdiction.

However, there is no reason why the strategies available in cross-border insolvency

should be limited to the universality-territoriality dichotomy. Many levels of cooperation

with various intensities may be envisaged. States have a whole continuum

of co-operative strategies available. For instance, they may well decide to co-operate

as far as deployment is concerned, thereby realising higher proceeds, but still use

proportionate shares of those proceeds to distribute according to local law. The paradigm

leaves r o om for states (and their courts) to formulate and adopt a strategy which

produces on balance the optimal pay-off."1 This emphasises the importance of the

procedural and open-ended nature of the paradigm.