1. Legal issues and terminology
Cross-border trade, economic and financial interdependences of businesses, but also mobility and migration of individuals lead to international elements in insolvency matters. In particular, if the assets of the insolvent debtor are situated in different states, the question arises whether and how this affects the enforcement of claims against the debtor. However, international elements can also result from the involvement of foreign parties or the application of foreign law to one of the legal relationships in question. As far as a cross-border effect of the debtor’s insolvency is recognized by the law, the question then arises how the assets situated in more than one country can be distributed among all local and foreign creditors or, if possible, how the international business could be restructured. This implies, primarily, collecting and understanding all available information about the estate and its assets, administering, restructuring and, if necessary, disposing of the assets.
In case of a financial collapse, all European laws provide on a national level for an enforcement of all claims against the debtor through a collective proceeding. Autonomous personal satisfaction and access to the assets of the insolvent debtor through individual enforcement proceedings are suspended in order to achieve the best possible collective enforcement and economic realization to cope with a scarcity of resources. This is instituted on the one hand to avoid a race by the creditors to enforce their claims individually as this has detrimental macroeconomic effects, and on the other hand to allow continuation of the business if the going concern value exceeds the liquidation value of the company. For this reason, legal systems provide not only liquidation proceedings but also so-called rehabilitation or restructuring proceedings.
International insolvency law undertakes to implement such objectives also in cross-border insolvency matters. National insolvency proceedings are based on the fundamental idea that creditors should be treated equally (par conditio creditorum, pari passu principle). However, the implementation of this principle, in particular the ranking of preferential creditors, differs among European legal systems. Furthermore, not only the interests of the creditors and their relation amongst themselves are decisive factors; additionally, the interests of the debtor, the protection of third parties as well as public interests have to be adequately taken into account. Accordingly, the principle of equal treatment is not strict and absolute; justice may even demand unequal treatment. Above all, in an international insolvency law context, the postulate of equal treatment also includes a conflict of law dimension: on the one hand, equal treatment may require conflict of law insolvency provisions to provide for a unitary connecting factor; on the other hand, it might be adequate to provide specific connecting factors for specific reasons, eg for the protection of individual parties to the proceeding. In addition, there are issues regarding substantive conflict of law aspects: a collective enforcement of all claims is only possible if the insolvency proceeding is recognized abroad or if the coordination with foreign parallel proceedings is successful; to achieve such a result the respective legal systems have to be reconciled with respect to their conflict of law and substantive law provisions, if necessary by applying the conflict of law doctrine of assimilation. At this point, it is not possible to identify principles that govern cross-border insolvencies. Besides the postulate of equal treatment of creditors and the handling of insolvencies in line with market conditions, there are usually contradicting national interests, eg the protection of national creditors, specific groups of creditors or the respective economy, as well as economic policy objectives.
In Europe, no uniform insolvency law governing cross-border insolvency matters exists. As national legal systems differ fundamentally, the way forward has been to create conditions that allow national insolvency proceedings to be conducted cross-border. The sovereign powers of states limit such approach insofar as the national insolvency law may not be enforced abroad. Whether those barriers are overcome, ie foreign national laws are recognized, is, until today, predominantly up to the confidence the particular jurisdiction has in the foreign judicial and insolvency systems. Therefore, the United Nations Commission on International Trade Law (UNCITRAL) confined the UNCITRAL Model Law on Cross-border Insolvency (1997) to providing provisions governing the recognition of foreign insolvency proceedings, the power of foreign insolvency administrators and the cooperation among courts and insolvency administrators in cross-border insolvency proceedings. Based on the principle of mutual trust between the Member States, Council Regulation 1346/2000 of 29 May 2000 on insolvency proceedings (European Insolvency Regulation (EIR)) takes a step forward and has created an authoritative legal framework for jurisdiction, recognition (recognition and enforcement of foreign judgments) and conflict of laws in cross-border insolvencies. This approach raises fundamental issues regarding the scope, operation and interaction of national insolvency laws and proceedings. These issues touch upon questions of international civil procedural law, in particular jurisdiction, recognition and enforcement, as well as conflict of law questions regarding private international law. Both are closely related in the area of international insolvency law as many insolvency provisions contain procedural as well as substantive elements, which are difficult to distinguish. Potential parallel national proceedings concerning the estate of the debtor or regarding the estates of several affiliated companies (of a group) necessitate the coordination of the proceedings and the cooperation by courts, administrators and possibly also creditors of several jurisdictions.
2. Legal development
Until the 20th century, the discussion about cross-border insolvencies was dominated by the controversy between the principle of universality and the principle of territoriality. Supporters of the so-called principle of universality followed the assumption that insolvency has universal effects and regarded collective enforcement and equal satisfaction of creditors as overriding objectives. The so-called principle of territoriality instead stresses the sovereign character of the opening of insolvency proceedings and the limited powers of state intervention, which only affects assets situated in the respective territory.
Apart from singular instances in the middle and early modern ages, the principle of territoriality prevailed in Europe until the middle of the 20th century—foreign insolvency proceedings were denied any domestic effects. Only bilateral treaties (see list of treaties in Art 44 EIR) and the multilateral Nordic Bankruptcy Convention of 7 November 1933 provided frameworks granting legal certainty for cross-border insolvencies. Foreign decisions relating to insolvency proceedings were not recognized at all or only via formal exequatur proceedings, eg in France and Italy. Although the German Imperial Court (Reichsgericht) had shown a positive attitude towards recognition in its first decisions, it then followed a strict territorial approach in its decision in 1902 (RGZ 52, 155), which became settled case law until 1985; the Court adhered to the principle of territoriality by applying a restrictive interpretation of § 238 of the former German Bankruptcy Code (Konkursordnung).
Universalist claims by scholars remained unheard for a long time. In his comments on choice of law in the 19th century, Friedrich Carl von Savigny had already expounded the view that there could only be one proceeding, namely at the place and in the state of the debtor; other states would have to provide legal assistance. Arguably based on Savigny’s view, scholars extended the principle of universality with a call for unified cross-border proceedings (the so-called principle of uniformity of proceedings, Einheit des Verfahrens). Particularly in the course of the Hague Conference on Private International Law, the proponents for universality and conformity of insolvency proceedings won recognition (1894–1925). However, the scholarly debate dealt only scarcely with specific conflict of laws issues and tried to no avail to thwart the principle of territoriality that prevailed in practice at that time.
In Germany, effects of foreign insolvency proceedings were not recognized until 1985 (BGH 11 July 1985, BGHZ 95, 256). As argued in legal literature since the end of the 1960s, legal practice increasingly started to resolve issues in cross-border insolvencies by applying general principles of international private law and procedure. In common law jurisdictions, some authorities, however, still hold that international private law rules are not suitable to resolve these issues.
Today, the prevailing opinion is that a uniform proceeding that captures and administers the worldwide assets of the debtor according to uniform rules would constitute the best option for cross-border insolvencies. As far as there are no uniform cross-border proceedings available, the insolvent estate would be administered ideally in one single national proceeding and under one respective jurisdiction, and the powers and decisions of the person in charge of the respective proceeding would be recognized worldwide. Parallel proceedings would only imply higher transactional costs and greater efforts in information gathering and cooperation, thereby impairing the estate resources available to settle the claims of the creditors.
The draftsmen of the Draft EEC Convention on Bankruptcy, Winding-up, Arrangements, Compositions and Similar Proceedings (1970 and 1980) tried to implement the principles of uniformity and universality. However, they came to realize that the substantive laws, in particular provisions concerning priority of claims in insolvency and collateral security in general, were so different that such differences could only be overcome in a uniform proceeding by accommodating them through complicated exceptions that took into account the state where the assets were situated, creating sub-estates calculated for each respective state. Additionally, practical problems became obvious, among others, the size of Europe-wide proceedings and the knowledge of the many languages and legal systems. But the Istanbul Convention of 1990, initiated by the Council of Europe (the European Convention on Certain International Aspects of Bankruptcy), was a breakthrough. Similar to the UNCITRAL model law of 1997, the Istanbul Convention only stipulated mutual recognition of the insolvency proceedings and provisions for a cooperation of the administrators. The Istanbul Convention provided the basis for the European Convention on Insolvency Proceedings of 1995 as well as for the EIR. As a result of political differences, the Convention never came into force but ultimately, the EIR having almost identical wording came into force in 2000. The ratification of the Treaty of Amsterdam in 1999 allowed a European regulation to be put into place as the treaty granted legislative powers to the EU with respect to judicial cooperation in civil matters.
Following the enactment of EIR and the UNCITRAL model law, many EU Member States have started reforming their international insolvency law beyond the EIR, eg Germany (Art 102 Introductory Act to the German Insolvency Code (EGInsO) and §§ 335 ff German Insolvency Code (InsO), 2003); Spain (Ley Concursal and Ley de Reforma Concursal, 2004); United Kingdom (the Cross-Border Insolvency Regulations of 2006) and the Netherlands (Voorontwerp Insolventierecht, 2007). The reforms clearly demonstrate the influence by one or both models but not a clear preference in favour of one of the models; for instance, the United Kingdom has adopted the UNCITRAL model law to govern cross-border cases outside the scope of the EIR whereas Germany has chosen to adopt provisions based on the concept of the EIR. A central difference between the EIR and the UNCITRAL model law can be found in the handling of recognition of foreign insolvency proceedings. While the EIR foresees automatic recognition, the UNCITRAL model law provides for a formal recognition procedure whereby all legal effects in the recognizing state are governed by the law of that jurisdiction. For this reason the UNCITRAL model law generally has a more international scope of application since it does not require either knowledge of or trust in the foreign legal system and is thus able to avoid frictions in the interplay of legal systems. In return, however, the courts of the recognizing state have to be prepared and competent to provide legal remedies that lean towards the law of the state in which the insolvency proceedings have been opened and that may not be provided, in form or substance, by their own national law.
Neither of the two models governs the questions surrounding cross-border insolvencies comprehensively. As in the times before their enactment, many problems need to be solved pragmatically with solutions accommodating the interests of all parties (cf guidelines by UNCITRAL, ALI or INSOL Europe and the so-called protocols used in practice regarding the cooperation of courts and administrators). At the same time, the development of national insolvency laws of many Member States also gained momentum, due, in part, to the enactment of the EIR. It is financially rewarding for the players in each country to administer cross-border insolvencies, in particular large profitable (group) insolvencies, in their own jurisdiction and according to the legal system familiar to them. Against this background, a race among stakeholders to be the first to initiate main insolvency proceedings in their jurisdiction has emerged. In case main insolvency proceedings have been opened, courts of other Member State jurisdictions may neither review such decision nor open further main insolvency proceedings (so-called principle of priority and exclusivity of main insolvency proceedings that is based on the principle of mutual trust, Art 3(2) and recital 22 EIR). The options provided for insolvent debtors including restructuring opportunities, ie insolvency proceedings and substantive insolvency law in the Member States, compete against each other. Apparent differences in the insolvency law were seen as a commercial disadvantage for which practitioners have stressed the need for reform (see reform of the French insolvency law in 2005) (Loi No 2005-845 dated 26 February 2005), execution decree No 2005-1677 dated 28 December 2005), in particular the enactment of the procédure de sauvegarde, and in Italy (Legge No 80/2005 of 14 May 2005). When it became apparent that companies were migrating to other jurisdictions in order to make use of an allegedly more favourable insolvency regime despite the large costs involved (although the EIR explicitly aims at preventing forum shopping, recital 4 EIR), even axiomatic principles were put up for discussions (see discussions among German scholars concerning company law provisions). As a result, the discussions focused on proceedings that aim at maintaining the going concern value and at avoiding formal liquidation proceedings like compositions (see Enterprise Act of 2002 in the UK, Best Procedure Project on Restructuring, Bankruptcy and a Fresh Start by the EU in 2002; La Sauvegarde Financière Accélérée of 2011 in France). In many instances, such proceedings can be instituted before actual insolvency of the debtor and do not require formal structures or judicial assistance. The EIR does not apply to all those proceedings; the concept of the EIR seems to focus rather on formal proceedings with sovereign participation. Against this background it remains to be seen whether and to what extent the EIR in its current form will remain the central instrument for administering cross-border insolvencies. German case law and literature currently deals less with questions of cross-border reorganization but rather with questions concerning international procedural law and conflict of laws that occur when applying the EIR (eg determination of the centre of main interests of the debtor in the context of jurisdiction according to Art 3(1) EIR, ECJ Case C-341/04 – Eurofood/Parmalat  ECR I-3813; characterization of so-called annex proceedings, see ECJ Case C-339/07 – Deko Marty Belgium  ECR I-767).
3. Regulatory structure of the European Insolvency Regulation
The EIR attempts to grant universal effect to insolvency proceedings in all Member States. Therefore, the EIR sets forth uniform provisions regarding the international jurisdiction for the opening of insolvency proceedings (Art 3), automatic recognition of the effects of the opening of insolvency proceedings, the powers of the liquidator and further decisions (Arts 16 ff) and the general application of the lex fori concursus (Art 4). Recognition may only be refused based on the public policy objection (Art 26). Similar to the UNCITRAL model law, a court has jurisdiction to open insolvency proceedings if the centre of the main interests of the debtor is situated within its territory (Art 3(1)). The EIR does not provide for special provisions for the insolvency of group companies; despite criticism by legal literature and practitioners, no specific provisions for group insolvencies were provided. However, solutions have been put forward to accommodate group situations under Art 3(1) EIR (see, inter alia, Re Lennox Holdings Plc  BCC 155 (ChD)). In light of the review process pursuant to Art 46 EIR, various reform proposals are being presented, inter alia, to replace the centre of main interest test and to provide specific provisions for corporate group insolvencies.
Contrary to the Brussels I Regulation (Reg 44/2001), which is the pivotal instrument governing jurisdiction and recognition, the EIR governs not only court decisions in civil and commercial matters but all decisions concerning the administration and all effects resulting from the opening of the proceedings according to the lex fori concursus. The decisions need not be rendered by the courts. The scope is limited to the types of proceedings that are expressly and finally listed in Annexes A and B for each Member State (according to Art 1(1) EIR, the scope is limited to collective proceedings, which require the insolvency of the debtor, the complete or partial confiscation of the debtor’s assets and the appointment of an administrator).
The regulation follows what is termed the ‘principle of controlled universality and uniformity’. Differences among the legal systems as well as practical problems are met by a limited application of the lex fori concursus, eg through providing special connecting factors concerning very important rights and legal relationships (Arts 5–15), allowing territorial proceedings if the debtor maintains an establishment in another Member State (territorial insolvency proceedings according to Art 3(2)–(4) and secondary proceedings according to Arts 27 ff in case a main proceeding is or will be opened). The option to apply for the opening of territorial or secondary proceedings undermines the aim of administering the estate in a uniform proceeding and has shown to be a powerful potential threat in the planning of cross-border reorganizations because a secondary proceeding would frustrate the inclusion of the estate for the reorganization. Although a coordination of the proceedings is provided for in the EIR, this has proven to be difficult in practice. The option can also be used to frustrate the general application of the lex fori concursus (Art 4) because in such a case the local lex fori concursus applies. This may be used, in particular by way of a previous migration, to compensate for different priorities. In any event, for reasons of legal certainty and legitimate expectations, the EIR foresees in some instances that the law of the state with the closest connection to the matter applies, eg with respect to employment contracts; contracts relating to immovable property; rights subject to registration and the protection of third parties that have purchased such assets after the opening of insolvency proceedings; rights and obligations of the parties to settlement systems as well as financial markets; and pending law suits (Arts 8–11, 14, 15). Certain interests in assets situated abroad are even exempted from the effects of the main insolvency proceeding, eg rights in rem of third parties, set-off and retention of title (Arts 5–7). Acts detrimental to the creditors are governed by both legal systems; such acts can only be clawed back, invalidated or are otherwise voidable if this is so determined by the lex fori concursus as well as by the lex causae (Arts 4(2)(m), 13). Potential different connecting factors, the complexity of regulatory attempts as well as the interrelation of functions from different fields of law often create problems with respect to characterization and adaption when determining the applicable law, cf shareholder liability, liability for wrongful trading, clawback claims etc. These difficulties occur especially in the context of companies constituted under a law different from the country where the centre of main interest is situated.
Proceedings relating to insurance companies or banks are exempted from the scope of application of the EIR. Those proceedings are governed by special directives (Dir 2001/24 of 4 April 2001 on the reorganization and winding up of credit institutions, Dir 2001/17 of 19 March 2001 on the reorganization and winding-up of insurance undertakings). Contrary to the EIR, these directives do not provide for secondary proceedings; this may be attributed to a higher level of harmonization in the area of banking law and insurance law (internal market (insurance)) and in particular with respect to its supervision (financial supervision; insurance regulation). Furthermore, there are further provisions in accompanying directives, eg in Dir 98/26 on settlement finality in payment and securities settlement systems and in Dir 2002/47 on financial collateral arrangements.
4. Substantive harmonization
Neither the EIR nor the UNCITRAL model law primarily aims at the harmonization of national insolvency laws. The EIR, however, contains fragments that harmonize procedural and substantive law aspects in cross-border cases (eg Arts 7(2), 20, 29–35, 39, 40 EIR). In contrast, the Principles of European Insolvency Law as well as the UNCITRAL Legislative Guide on Insolvency Law aim to develop uniform insolvency law principles; they are designed to serve as a basis for harmonization projects or national law reforms. In 2002 the EU also instituted an expert group, ‘Restructuring, bankruptcy and a fresh start’, to work on principles and guidelines for systems of effective insolvency and creditor protection as well as best practices. Additional projects aim to develop principles for cooperation in cross-border insolvencies.
Alexander Trunk, Internationales Insolvenzrecht (1998); Jay Lawrence Westbrook, ‘Multinational Enterprises in General Default: Chapter 15, The ALI Principles and The EU Insolvency Regulation’ (2002) 76 American Bankruptcy Law Journal 1; Stefan Reinhart and Ulrich Ehricke, ‘Internationales Insolvenzrecht’ in Hans-Peter Kirchhof, H Jürgen Lwowski and Rolf Stürner (eds), Münchener Kommentar zur Insolvenzordnung, vol 3 (2003); Paul Omar, European Insolvency Law (2004); Ian F Fletcher, Insolvency in Private International Law (2nd edn, 2005); Bob Wessels, International Insolvency Law (2006); Peter Gottwald, ‘Internationales Insolvenzrecht’ in Peter Gottwald (ed), Insolvenzrechtshandbuch (2006); Horst Eidenmüller, ‘Gesellschaftsstatut und Insolvenzstatut’ (2006) 70 RabelsZ 474; Klaus Pannen (ed), European Insolvency Regulation (2007); Philip R Wood, Principles of International Insolvency (2007); Wolf-Georg Ringe, ‘Forum Shopping under the EU Insolvency Regulation’ (2008) 9 EBOR 579; Bob Wessels, Bruce A Markell and Jason Kilborn, International Cooperation in Bankruptcy and Insolvency Matters (2009); Gabriel S Moss, The EC Regulation on Insolvency Proceedings (2009).