Silos: Establishing the Distributional Baseline in Cross-Border Bankruptcies

Abstract

The first two decades of law reform related to cross-border bankruptcy are the paired story of the UNCITRAL Model Law (Chapter 15 in the United States) and the EU Insolvency Regulation (the EU Reg). Both seek to create an architecture whereby a court located at a debtor’s center of main interest (COMI) can coordinate the insolvency of a debtor with assets and operations in multiple jurisdictions. The Model Law focuses on the automatic recognition of foreign representatives, and the creation of an ancillary proceeding to administer local assets and claims or transfer them for administration in the main case. Both statutes focus on centralizing administrative power in the “main case.” Relatively less attention has been paid to how assets should be administered in the main case pending at the debtor’s COMI. Governing law has beenassumed to be domestic bankruptcy law in the main, and a subset of domestic bankruptcy law in the ancillary jurisdiction. The next round, of law reform will be devoted to developing and harmonizing the procedures for administering the main case pending at the debtor’s center of main interest in a manner that facilitates cooperation in cross-border cases. In particular, the goal of these efforts should be to adopt measures that: (1) facilitate cooperation by ancillary courts; (2) minimize the effects and incentives for forum shopping; and (3) minimize the conflicts of interest faced by those charged with administering assets in multiple jurisdictions. This article argues that the success of these efforts is going to turn largely on the ability to distinguish harmonized and global bankruptcy procedures from locally determined substantive rights — finding the proper scope for lex fori (law of the forum) and lex situs (law of the location of the property or cause of action) respectively. This choice-of-law approach envisions cooperation a two-way street. This idea — using choice of law principles to allocate value — is motivated by a principle that might be called “global best interests.” In a coordinated case, the distributional baseline entitlement would be determined by calculating the amount that would be received in a hypothetical territorial liquidation. Local claims would be entitled to a minimum distribution based on their local priorities, though limited to the assets that would have been available in a territorial case had one been filed. The practical task imposed on courts (and administrators) would be to calculate the hypothetical territorial distribution. This Article make two related points. First, it acknowledges that the choice of law approach places great pressure on the ability to locate claims and assets for the purpose of distribution, but argues that ultimately the task is not too hard. Second, it explains why the exercise is worth the trouble, in that it offers a practical basis for allocating value in, and a normative basis for, justifying global reorganizations.