In legal theory, the regulation of cross-border insolvency is dealt with from two different angles. Under the universalist approach, cross-border insolvencies are administered pursuant to a single global insolvency regime. All of the debtor’s assets are distributed by a single insolvency office holder, regardless where the assets or claimants are located. The ideal of universalism is one court, one law (and sometimes also one proceeding, one estate). In contrast, under the territorial approach, each country exercises its own domestic insolvency laws in relation to all of the debtor’s property and all of the creditors located within its jurisdiction. This approach does not recognise any extraterritorial dimension to insolvency law.
Although “universalism” and “territoriality” are terms frequently used, they only describe the points of departure of several doctrinal theories. The contrast between “universalism” and “territoriality” serves to demonstrate the possibility of a political choice between a system in which there is one set of insolvency proceedings with worldwide effect, and a model in which the effect of such proceedings will be limited to the borders of the state in question. In practice, however, there is no single state in the whole world fully embracing one of these models. Most countries have introduced modified or mixed models of these theories. Since the beginning of the 1990s, developments in legislation in several countries have also molded these doctrinal theories into concepts that can be better used in practice. For instance, in theory the “territoriality” model can be limited by; (i) narrowing the conditions for opening proceedings to the existence of an establishment belonging to the debtor in the territory of the state in question, rather than the mere presence of an asset; or (ii) allowing foreign creditors to participate in the proceedings, resulting in a “territorial” estate, but a “universal” composition of the body of creditors and a “universal” system for distribution; or (iii) introducing mechanisms for cooperation between, or recognition of, the various territorial proceedings, of which the concept of bilateral conventions between states is an example. Universalism, on the other hand, may be limited in its broad effects by; (i) allowing certain subordinated territorial proceedings in other states to run alongside the main insolvency proceedings, which is the German model for cases outside the EU; or (ii) by creating exceptions to the application of the law of the state in which proceedings have been opened (the lex fori concursus), which is the EU Insolvency Regulation model. In most countries, including English speaking countries and the USA, models are – or have been – used that fall between the stringent principle of territoriality on the one hand and the panoramic principle of universalism on the other. Such “fall between” models are usually referred to as “modified”, “limited”, or “curtailed” universalism, as most of them have a universalist element at their core. The EU Insolvency Regulation is generally regarded as being based on a mixed model or a model of modified universalism.
Similarly, in the UK, the idea of “modified” universalism has set the tone. An example is the UK House of Lords decision of 2008, HIH, which dealt with the collapse of an Australian insurance group. In HIH, Lord Hoffman, noted that “… the primary rule of private international law which seemed to me applicable to this case is the principle of (modified) universalism, which has been the golden thread running through English cross-border insolvency law since the eighteenth century”. Lord Hoffman’s view on modified universalism, however, was not adopted by three of the other four judges. Nevertheless, the UK House of Lords ruled that the English assets of four companies in liquidation in Australia and in ancillary provisional liquidation in England must be remitted to Australia for distribution under the rules of Australian insolvency law.
The variations of “modified” universalism and its manifestations – where “main” proceedings are supported by “ancillary” proceedings or “secondary” proceedings – have sparked initiatives for cooperation between courts or insolvency office holders, in circumstances where the applicable legislation itself did not provide grounds for such relief. Although supporters of this type of cooperation are generally in favour of a worldwide convention, they acknowledge the present limited and insufficient public law framework for international insolvency. Given the fact that global insolvency proceedings differ in their goals and in their legal consequences, the pragmatic solution is, according to this view, to devise a “protocol” describing how the administration of proceedings should be exercised in each individual international insolvency case. All courts and insolvency office holders involved should communicate and coopereate, based on several sets of non-binding principles and guidelines, to work towards the solutions sought in the protocol. Such cooperation is crucial to the success of the modified universalism concept.
Meawhile, international scholars have been looking for improvements to the model of modified universalism. In her recent book, professor Irit Mevorach at the University of Nottingham combines several non-binding sources of international law with behavioural and economic theory. She sets out to translate modified universalism into binding international law and examines how to choose the right instrument for cross-border insolvency as well as the impact that instrument design has on decisions and choices. The book is presented as a blueprint for meeting the demands of future cross-border insolvencies. Although not a new concept, professor Mevorach makes the argument that several of the available means in the modified universalism approach – soft law principles and guidelines, best practices, etc – may be regarded as customary international law; a legal source that fills gaps in international treaties, influences treaty regimes, and regulates areas not covered by treaties or by other instruments or regarding countries that are not parties to a treaty. Being regarded as “customary international law” would bring these principles and practices under the international jurisdiction of the International Court of Justice via Articles 36 and 38 of the Statute of the International Court of Justice.
Chicago-Kent College of Law professor Adrian Walters also recently called for action on the actual implementation of the universalist approach, since cross-border insolvency law scholars have devoted much attention to the theoretical questions of international system design, but paid less systematic attention to how a universalist system can be implemented in the real world by institutional actors such as legislatures and judges. Looking at the UK’s and the USA’s reception of the UNCITRAL Model Law on Cross-Border Insolvency, Walters’ argument is that modified universalism offers no convincing theory of how a universalist system can be institutionalised in practice, in the absence of more and harder law by individual country legislatures. The focus must shift from practitioners and courts to state legislators. This would also be neccesary as for instance the Model Law lacks a system of choice-of-laws. In April 2010, at the initiative of the International Bar Association (IBA) at UNCITRAL, the idea to work on a convention was tabled in cooperation with the Hague Conference on Private International Law. However, a different course – that of creating further model laws – was eventually chosen.
The EU approach
It is generally agreed that the recast EU Insolvency Regulation (EIR 2015) uses the “modified universalism” model in relation to an insolvent debtor’s assets. This model results in the potential split of insolvency proceedings against an insolvent debtor who has operations in two or more EU jurisdictions (Denmark excluded). Main insolvency proceedings can be opened in member state X, when the debtor’s centre of main interest (COMI) is in that member State (Article 3(1) EIR 2015); these will extend to assets situated in other member states, except those where secondary proceedings have been opened. Secondary insolvency proceedings can be opened in the other member states where the debtor has an establishment within the meaning of Article 2(10) of the EIR 2015, but are confined to local assets. The proceedings, as they are both concerned with the same insolvent debtor and its estate, should be coordinated, but on a practical level they do not operate on an equal footing. The insolvency practitioner in the main proceedings has the dominant role and has several possibilities open to them for intervening in secondary insolvency proceedings. This underlying model has been referred to as “mitigated” or “modified” universalism. In my own publications I have introduced the concept of “coordinated universalism”. This concept both focuses on a certain conflict-of-laws rule or norm of private international law, and appeals to interrelated main and secondary insolvency proceedings coordinated by courts and insolvency practitioners, in line with their respective duties. In literature, the term has only found slight support, however, including in a 2013 opinion by Advocate General Sharpston at the European Court of Justice (CJEU) in Ralph Schmid etc v Lilly Hertel.
The name to describe the systematic model underlying the European Insolvency Regulation has not been decided yet. In an October 2016 judgment of the CJEU related to the interpretation of Article 5 of the EIR 2000 on third parties’ rights in rem (now embodied in Article 8 of the EIR 2015), two other terms for describing the model are introduced. The Court observed that the regulation: “17 … is based on a so-called ‘attenuated universality’ model, according to which, first, the law applicable to the main insolvency proceedings and its effects is that of the Member State within the territory of which those proceedings were opened, albeit that, secondly, that regulation lays down a number of exceptions to that rule. Article 5(1) of that regulation lays down one of those exceptions.” Not modified, or coordinated, but “attenuated”: a word the Advocate General did not use in the relevant associated opinion. In the English version of the judgment, the wording refers to “… a model of qualified universality”. In Dutch, it is referred to as “afgezwakte universialiteit”; in German “abgeschwächten Universalität”; in French “d’universalité atténuée”.
So the point of departure for the European Insolvency Regulation is the universalist model, but the regulation then lays down a series of special rules that operate as exceptions and that adjust, qualify, refine and dilute its universalism. This may be a fair reflection in as far as it relates to the private international law rules of the Regulation, but it does not take into account the mandatory coordination between main and any secondary insolvency proceedings by courts and insolvency practitioners.
HIH Casualty & General Insurance Ltd, Re  UKHL 21 (para. 30)
Irit Mevorach, “The Future of Cross-Border Insolvency. Overcoming Biases and Closing Gaps”, Oxford University Press 2018
Adrian Walters, “Modified Universalisms & the Role of Legal Culture in the Making of Cross-Border Insolvency Law” (forthcoming in American Bankruptcy Law Journal)
Attorney General Sharpston, Opinion in case C-328/12, ECLI:EU:C:2013:540 (Ralph Schmid etc v Lilly Hertel)
Court of Justice of the EU 26 October 2016, Case C 195/15 (SCI Senior Home v Gemeinde Wedemark, Hannoversche Volksbank eG)
This is a slightly adapted version of a regular column I am writing for Global Restructuring Review (GRR) on a topic of cross-border restructuring and insolvency in a European context. GRR is a subscription-only publication, but here is a link to the full piece, which appeared in October 2018 on GRR’s website at http://globalrestructuringreview.com