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Proposed Guidelines for Coordination of Multi-National Enterprise Group Insolvencies

Client Advisory

October 5, 2012

In an increasingly global economy, which continues to face serious financial challenges, multi-national corporate groups may fail, with members of the group facing insolvency proceedings in many different jurisdictions. Unified global insolvency proceedings for such multinational groups are not possible, because of the difficulty of exerting control over assets physically located in another national jurisdiction, the strong national interests in the preservation of sovereignty and in the application of local laws (such as avoidance powers, employee benefits, lien priority and taxation), and the absence of applicable treaties.

Approaches to insolvency vary among nations, ranging from the bias in the United States for reorganization under pre-petition management, to a preference for liquidation at the hands of independent insolvency professionals in most other jurisdictions. Different national laws also emphasize different priorities for different classes of creditors, and have different rules regarding enforceability of pre-petition agreements.[1] As a result, territorial disputes can occur about the optimal approach to the global insolvency, and the lack of a unified approach means that maximization of value for the benefit of the stakeholders can be difficult to achieve, and reorganization of the group may well be impossible.

The inevitably fractured nature of multi-national insolvency procedures leads to lack of certainty and predictability, which in turn may have a deleterious effect on global trade. Potential lenders and other creditors may be reluctant to enter into business with cross-border entities without imposing burdensome costs on the transactions. For these reasons, there is a pressing need for guidance for courts and practitioners facing global business failures.[2] 

Recognizing the lack of international guidance or standards for multi-national cross border insolvency cases, [3]  the Committee on International Jurisdiction and Cooperation of the International Insolvency Institute commenced work in 2008 on a set of guidelines intended to facilitate cooperation and communication among courts and insolvency representatives in such cases. The necessity for the work was made all the more apparent with the global Lehman failure later that year, and the Nortel bankruptcy in early 2009. Between 2008 and 2012, the Committee presented a number of different iterations of the proposed guidelines at the III’s annual conferences, and obtained extensive comments from the III membership including advice on the extent to which the Guidelines could be applied in the various jurisdictions in which the III members practice. 

Among the most useful of the comments received were from civil law jurisdictions, in which courts have less discretion than those in common law countries to adopt or implement guidelines such as these without explicit statutory authority. The Committee was encouraged to learn that in many situations, even if courts and insolvency representatives are unable to implement the Guidelines as proposed, they may endeavour to effectuate the Guidelines’ objectives within existing law.

The Committee will seek final approval of the Guidelines at the International Insolvency Institute’s 2013 conference. The most current version of the Guidelines may be viewed at http://www.iiiglobal.org/component/jdownloads/viewcategory/14.html.  

The Guidelines apply to an enterprise group with members, operations, assets and employees located in more than one country, which has unified corporate governance, either through common or interlocking shareholding or by contract. They may also provide assistance in coordinating the insolvencies of multinational enterprise groups whose component parts operate with relative independence.

The forms of cooperation proposed in the Guidelines fall along a continuum, beginning with actions that are possible now under many existing insolvency laws and ranging to forms of cooperation that will require amendment to most existing laws to achieve.   The Guidelines propose “universal principles,” contained in Guidelines 1-6, which may be employed under many if not most existing insolvency regimes, and which should be applied in all cross-border multinational enterprise insolvencies. These universal principles urge insolvency practitioners to identify all affiliates of a debtor and all corporate managers responsible for the global operations, to advise the court of any affiliates, and to notify all affiliates of the bankruptcy filing. The courts are encouraged to authorize affiliates to be heard on any matters that affect the enterprise. The courts are also urged to defer the COMI determination of a debtor until after it ascertains all factors relevant to the enterprise’s operations. They are urged to use the Communications Guidelines in communicating with other courts that have jurisdiction over affiliates. Finally, insolvency representatives are urged to communicate freely with their counterparts in other nations to ensure cooperation and coordination of multinational insolvencies.

Guidelines 7-11 are currently permitted in many insolvency jurisdictions, but not all. They encourage the use of protocols, which as discussed above is becoming the standard means of coordinating cross-border cases. The Guidelines also suggest that where conflicts of interest permits, a single insolvency representative and a single office holder for each other category (such as counsel, accountants, restructuring officers and creditors’ committees) be appointed for all members of the group.

Finally, Guidelines 12-22 focus on the concept of deference to a group center for an integrated multinational enterprise, to permit the value of the multi-national enterprise to be maximized for the benefit of all stakeholders. The Committee recognizes that these Guidelines would require amendment of existing law in most if not all jurisdictions, and they are, therefore, proposals for legislative reform. They were drafted to supply assistance as the European Union and UNCITRAL, and nation states restructuring their insolvency laws, as they turn to consideration of the insolvencies of multi-national enterprises.

The Guidelines are silent on choice of law issues. Earlier iterations attempted to propose certain guidelines for choice of law in multi-national cases, but after discussion in the International Insolvency Institute and with the Committee’s advisors, the Committee concluded that it would not be possible to reach consensus on choice of law rules. Parties in interest are, of course, free, and encouraged, to address choice of law issues in protocols, where feasible.

The Committee hopes that these Guidelines will provide tools to assist courts and practitioners in wrestling with cross-border cases, and will suggest paths for legislative reform.

 

Questions regarding this advisory should be addressed to Susan Power Johnston (212-238-8695, johnston@clm.com), or James Gadsden (212-238-8607, gadsdem@clm.com).

Endnotes

[1] A well-known example of this problem arose in the Lehman case, in which the U.S. bankruptcy court and the U.K. bankruptcy court reached opposite conclusions about the enforceability of a provision in transaction documents governing credit-linked synthetic portfolio notes that fixed the relative priority of the interests of the noteholders and the issuer following default. Compare Lehman Bros. Special Fin. Inc. v. BNY Corporate Tr. Servs. Ltd., 422 B.R. 407 (Bankr. S.D.N.Y. 2010) and Perpetual Tr. Co. Ltd. V. BNY Corporate Tr. Servs. Ltd., [2009), EWHC 1912, 2009 WL 2221998. Another example arose in the Qimonda case, exploring the marked difference between how patent licenses are treated in German law and US law. In re Qimonda A.G. Bankruptcy Litigation, 433 B.R. 547 (E.D. Va. 2010).

[2] See, e.g., UNCITRAL Practice Guide on Cross-Border Insolvency Cooperation, I.A.1-3, pp. 9-10 (United Nations, 2010); see also Revision of the European Regulation: Proposals by INSOL Europe, May 2012, pp. 7-8 http://www.insol-europe.org/technical-content/revision-of-the-european-insolvency-regulation-proposals-by-insol-europe/revision-of-the-european-insolvency-regulation-proposals-by-insol-europe/.  

[3] Several international initiatives have attempted to address the problems of cross border insolvencies. None of them include comprehensive provisions for multi-national corporate enterprise insolvencies. See, e.g., UNCITRAL Model Law on Cross Border, the E. U. Regulation, the increasing use of ad hoc protocols, the Principles of Cooperation Among the NAFTA Countries, and the Global Principles for Cooperation in International Insolvency Cases.



Carter Ledyard & Milburn LLP uses Client Advisories to inform clients and other interested parties of noteworthy issues, decisions and legislation which may affect them or their businesses. A Client Advisory does not constitute legal advice or an opinion. This document was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. © 2017 Carter Ledyard & Milburn LLP.
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