In her book The Future of Cross-Border Insolvency: Overcoming Biases and Closing Gaps, University of Nottingham’s professor of international commercial law Irit Mevorach explores theoretical and practical developments in the field of cross-border insolvency. She uses a wide scope including both commercial entities and financial institutions. She also employs a broad interdisciplinary perspective, including public international law, international (soft) law making, and behavioural and economic insights. Nevertheless, in some 260 pages she succeeds in presenting a gripping study. The book rather differentiates from her earlier work, ie the development and success of cross-border insolvency instruments, the glass half-full, she characterises this research. Now it’s time to look at the glass half-empty with the aim to provide insights about the future of cross-border insolvency and how the system can be improved going forward.
The book was published by Oxford University Press in 2018. Mevorach uses six chapters to build her theory, which is supported by a wealth of international sources. I am pleased to see that throughout her work she refers to several of my publications (when I see this correctly, always with approval) or for instance also to the principled study my colleague Ian Fletcher and I published and presented in 2012 to the American Law Institute.
Some short observations follow below, related to her study. Mevorach’s starting point is the given that the overriding approach to cross-border insolvency to date is ‘modified universalism’. It uses prescribed norms for efficient centralization of a process dealing with insolvency, mostly aimed at one corporate debtor, divided into two or more insolvency proceedings and the rules for cooperation in cross-border insolvency proceedings. Modified universalism is not a noncommittal appeal to the ideal of full universalism, rather still a somewhat fragile line of thinking, trend or general principle, quite amorphous and not adopted or applied universally. Moreover, in practice, it is always under attack of territorialism. Courts in sovereign countries imposing their own rules, encouraging a multiplicity of proceedings which in turn escalates costs and go against the anathema of maximising the enterprise value, which is professed as the core goal of any effective insolvency regime. So Mevorach raises the question of whether deviations from modified universalism represent true preferences, whereby a more territorial approach is been regarded as desirable at least by some countries; what holds modified universalism back?, and from the glass half-full perspective, what was so worthwhile that modified universalism spread over large parts of the globe, although what modified universalism itself is, is rather vague, and, as said, its implementation in practice is not always uniform.
Mevorach then submits that territorialist inclinations can be explained by bounds on decision making exacerbated by capacity gaps and differences in starting positions. She reports about behavioural theories and experiments which have shown these bounds in real-world circumstances in the form of recurrent biases. In this light, the author argues, that it can be expected that territorialist inclinations are affected by biases. The decision process is influenced by loss aversion (exaggeration of losses compared to gains), status quo (aversion to change) and perceived endowments in cross-border insolvency (people want to get more to give up something). Mevorach sees this way of acting especially in relation to multinational financial institutions and I tend to agree with her. In a forthcoming publication ‘Research Handbook on Cross-border Bank Resolution’ (Matthias Haentjens, Bob Wessels (eds.), Edward Elgar, 2019) I have drawn this conclusion. The phenomenon of short-termism bounds on will-power may all contribute to territorialist tendencies, such as asset ring-fencing or lack of or minimal cooperation, she advances. Cognitive psychology and behavioural international law lead in Mevorach’s words to a cross-border insolvency system with a debiasing role, which can overcome and address possible bounds in decision making. Mevorach argues, therefore, that the cross-border insolvency system has a ‘debiasing’ role where, through adoption of certain strategies and tools, it may be able to align choices with optimal solutions. That’s quite a challenge!
In the second edition of my book on International Insolvency Law (2006) I tossed the idea that when States are involved in exercises of recording ‘best practices’ or follow these as were they approved as ‘law’, it is possible to qualify these ‘best practices’ as ‘customary international law’. I used the ideas of Culmer (1999), when he was assessing the use of the – at that time well known – Concordad. The result of such a thought experience would be that such practices would be promoted to the international jurisdiction and its norm of guidance to decide cases, in the meaning of article 36(2)(b) and article 38(1)(b) Statute International Court of Justice. In the 2015 edition of my book I declared, however, that this topic was beyond the boundaries of the book. So, at least in that publicatoon, no further discussion of the different aspects of soft law, see para. 10089 and 10116, in the book mentioned.
I was therefore pleasantly surprised that Mevorach, as one of the tools to be able to align choices with optimal solutions in cross-border insolvency, uses customary international law (in her abbreviation: CIL) as a key legal source that fills gaps in international treaties, influences treaty regimes, regulates areas not covered by treaties or by other instruments or regarding countries that are not parties to a treaty or to another regime. In a convincing way Mevorach argues – aspect per aspect, layer by layer, point by point – that modified universalism can fit into the general approach to CIL, based on a thorough study of sources of public international law. She also argues that CIL can assist in the areas where biases impede progression to more optimal solutions, but that it is necessary to reconceptualise the position of modified universalism delinked from pure universalism as a standalone approach, with greater emphasis of the international role of cross-border insolvency. Recognising that CIL has important limitations, she is nevertheless convinced that cross-border insolvency norms can be translated into technical rules in written international instruments.
Although the general view in the field of cross-border insolvency has been that a global treaty is the ultimate ideal, reflecting the aspiration to eventually reach a purely universalist system, she makes the case that via soft law instruments (such as the (future) Model Laws from UNCITRAL) that are utilized in various international law subsystems may in fact be ‘harder’ than a treaty. Specifically, a model law approach can possess the characteristics of hard law, while retaining flexible features that induce participation. Her arguments include an economical analysis of international law, an assessment of incentives and sanctions that may encourage reciprocal behaviour and the effectiveness of certain tools and the interrelation between compliance and problems of institutional and regulatory capacity. I concur with her assessment of the role of capacity building and stress with her the importance of mutual trust in each other and each other’s legal systems, within or outside the EU and the internationalisation of private international law.
Here, the participants in the debate, legislators, regulators and judges should act also as creators of standards and rules for cross-border insolvency. CIL acts as a legalisation stamp, to strengthen the cross-border insolvency system. This principled approach unfolds foundations of modified universalism, whereas Reinhard Bork’s 2017 book on Principles of Cross-border Insolvency Law – equally important – reveals basic values and commonalities between insolvency foundational principles across legal systems. He distinguishes three groups of principles, which may help judges to decide in individual cases and could provide functional building blocks for shaping cross-border insolvency law. Where his approach clarifies the present legal puzzle with looking for shared norms, Mevorach’s book adds a strong future normative element, assesses the right instrument to go forward and – addressing behavioural and economic theories – claims that her solutions could take into account, even could potentially overcome behavioural biases in decision-making. For a short review of Bork’s book, see blog/2017-10-doc1-book-bork-on-cross-border-insolvency-law
There remains a lot to be done, and Irit Mevoracht has skilfully put a revival of private international law relating to restructuring and insolvency on the top of the global agenda. Cross-border insolvency law should engage in international norm creation especially through courts and other authorities presiding over cross-border insolvency cases. They have done so, more ad hoc in the past. They should do so in the light of all available new sources. Also regulators, policy makers, and international organizations should be engaged in international insolvency law making and should be, as Mevorach points out, less context-dependent and should perceive their roles more broadly, considering public international law sources and mechanisms for creating and enhancing international obligations.
The book is essential reading for all interested in the on-going development of a solid cross-border insolvency system. It is not only of importance for academics and researchers. It is an original and topical presentation of a way to get the glass filled better than half and should be read and discussed by legislators (mostly working in territorial isolation) to conceptualise what is needed to assess and improve the structure of its existing cross-border insolvency framework. The book may also serve as a benchmark for the test whether for a country any insolvency system is adequate for the future challenges in the coming decades. In the context of the European Union attention should be paid to Article 288 TEU (formerly Article 249 EC Treaty), which allows for the introduction of measures of ‘soft law’, as its last paragraph states: ‘Recommendations and opinions shall have no binding force’. To formulate the proper balance to be found between the EIR Recast (including its soft law instruments based on its content, such as a ‘protocol’ or an ‘undertaking’), and the first stage of harmonisation with a preventive restructuring framework, Irit Mevorach’s book makes a significant contribution to further such recommendations.
Irit Mevorach, The Future of Cross-Border Insolvency: Overcoming Biases and Closing Gaps, Oxford University Press 2018. ISBN 9780198782896.
Additional information, see global.oup.com
Note: this book I received free of charge from the publisher with the request to announce it or to review it on my blog at www.bobwessels.nl.