In some quarters, forum shopping in general and insolvency forum shopping in particular has a bad name. For present purposes, insolvency forum shopping may be defined as the movement of assets from one country to another so as to take advantage of a more favourable legal position.Footnote 1 But strategic manoeuvring and transaction planning is what litigation and case management is all about. Parties to a case can hardly be expected to rest content with an unfavourable legal position. Certain countries are popular as forum shopping venues for insolvency cases. This may because of the substantive law in a particular country or else the procedural advantages brought about by litigating a case in that country. Despite the quality of the substantive goods or service supplied in a particular country, the country may be off limits to foreign litigants, however.Footnote 2 The barriers to entry may be too difficult to surmount. This paper critically evaluates the forum shopping possibilities offered by both the UK and US in corporate bankruptcy cases.Footnote 3 It looks at both the demand side of the equation—why the UK and US are attractive to foreign forum shoppers—and also the supply side—the extent to which the insolvency jurisdiction of the UK and US is open to foreign companies. The paper has very much a US/UK focus and does not address directly forum shopping possibilities offered in an EU context by the Regulation on Insolvency Proceedings. This matter has been extensively covered elsewhere.Footnote 4
The paper consists of six sections. The first section considers the goals of insolvency law; where insolvency jurisdiction should be exercised, and forum shopping in general. The second section addresses why the UK and US may prove attractive as forum shopping venues in insolvency cases. The third section considers jurisdictional thresholds for foreign companies making insolvency filings in the UK. In this connection a distinction is drawn between liquidation and restructuring proceedings. The fourth section addresses the situation in the US. The fifth section considers the impact of the UNCITRAL Model Law on Cross-Border Insolvency on this area and the final section concludes. The message is that while the UK may have shut its doors too firmly against foreign forum shoppers, the US is too much a safe haven. The paper calls for a measure of jurisdictional restraint through raising entry barriers. While some jurisdictional competition in insolvency law-making may be no bad thing, the US approach runs the risk of undermining important policies held dear by other countries. It is also asymmetrical in that US bankruptcy jurisdiction is assumed in situations where, if foreign countries had acted on a similar basis, US recognition of the foreign proceedings would be denied.
I. THE GOALS OF INSOLVENCY LAW, EXERCISING INSOLVENCY JURISDICTION AND FORUM SHOPPING
A. Insolvency Law Goals
Insolvency law is intended to provide for the orderly winding up of person's affairs—a means for the more efficient collection of the debtor's assets and their distribution to creditors. Lord Hoffmann in the Cambridge Gas case described it as a form of collective execution against the property of the debtor by creditors whose rights are admitted or established.Footnote 5 The formal insolvency process minimizes collection costs and also helps to maximize the overall pool of assets by stopping a series of individual executions of creditors against debtor assets that may deplete general asset values. In this respect, insolvency law helps creditors as a collective class.Footnote 6 But insolvency law also furthers other goals.Footnote 7 In its rescue and restructuring provisions, insolvency law may help a debtor get back on its feet through a moratorium on collection efforts by creditors. This gives the debtor or its insolvency representatives the opportunity of putting into operation a business rescue plan. Successful implementation of a rescue plan should bring direct and indirect benefits to so-called stakeholders in the debtor's business through increased goodwill and revenue-generating capacity. Those benefited include employees, consumers of the debtor's products and the local community where the debtor's operations are based.Footnote 8
Different countries may put different emphases on different aspects of insolvency law.Footnote 9 For example, some countries may place the emphasis entirely on liquidation and have no mechanism in place for formal business restructuring. But the recent emphasis is the other way and proposals by the European Commission for reform of the European Insolvency Regulation recognize a shift within Europe from liquidation proceedings to restructuring proceedings.Footnote 10 There are different views on whether the optimum use of assets can be achieved by selling off a business to the highest bidder as distinct from trying to negotiate a restructuring within the existing corporate framework.Footnote 11 Opinions differ on the extent to which a company should be allowed to ignore or set aside existing contractual commitments during the insolvency process. For instance, the US Bankruptcy Code allows a bankrupt debtor to assume or reject executory contacts; in effect to cherry-pick the most profitable contracts and to disregard the others.Footnote 12 There is no general equivalent in the UK though section 233 of the Insolvency Act prevents certain utility suppliers from insisting upon payment of arrears as a condition of further supplies to insolvent debtors. There is nothing, however, to prevent suppliers from altering the terms of supply and increasing tariff payments and this has led to provisions, as yet unimplemented, for reform of the section.Footnote 13
The priority given to secured credit, whether secured creditors are subject to a bankruptcy or restructuring moratorium and whether secured creditors can be forced to ‘buy in’ to a restructuring plan against their wishes, are also areas where national differences in insolvency law remain pronounced. For instance, Recital 11 of the preamble to the EU Insolvency RegulationFootnote 14 acknowledges that as a result of widely differing substantive laws it was not practical to introduce insolvency proceedings with universal scope throughout the entire EU. While Recital 25 concedes that security rights are of considerable importance for the granting of credit, Article 5 of the Regulation largely immunizes secured creditors from the consequences of the opening of insolvency proceedings.Footnote 15
Insolvency laws differ on the extent to which there is an investigation of the causes of the company's financial difficulties and whether company management can he held personally responsible for these failings. Moreover, there are different ideas about whether and under what circumstances pre-insolvency transactions may be set aside at the instigation of an insolvency administrator and the respect given to the policy of ensuring the security of transactions.Footnote 16 The treatment of employees in insolvency, whether it is in the context of continuation of employment or pensions, is another important area of difference.Footnote 17 For instance, in the UK the Pensions Act sets out a particular regime that operates with respect to the underfunding of corporate pension schemes but it does not have anything specific to say on how the regime is to be applied when the company enters a formal insolvency process. In Bloom v Pensions Regulator Footnote 18 the Supreme Court decided that the unfunded pension liabilities were a provable debt in the insolvency process but did not enjoy any ‘super-priority’. Similar issues have been litigated in Canada in Sun Indalex Finance LLC v United Steelworkers Footnote 19 and while the end results in the cases are broadly comparable, they do reveal some different emphases in national policies on the treatment of underfunded pension liabilities in a corporate insolvency.
The priority accorded unpaid tax and environmental clean-up claims are also fertile ground for national variations in insolvency law provision. For instance, the UK abolished the preferential status of tax claims in the Enterprise Act 2002 but other countries have not necessarily followed suit.Footnote 20 In the UK also it is clear from Re Celtic Extraction Ltd Footnote 21 that claims for the alleviation of past environmental damage are not generally to be treated as an ‘expense’ of the insolvency process and therefore entitled to super-priority. Again, the same issue has been hotly contested recently in Canada.Footnote 22 In general it is true to say that the shape of a country's law in general, and insolvency law in particular, owes a lot to the balance of political power and the form of social arrangements in that country.Footnote 23 In the insolvency context, local policy concerns often trump wider considerations of international comity. This is graphically illustrated by the Singapore Chief Justice loudly defending provisions of Singapore law that ring-fence ‘local’ assets for the benefit of local creditors.Footnote 24
B. Exercising Insolvency Jurisdiction
In the modern business environment even the most superficially straightforward insolvency case may have an international element. Payments to creditors may, for instance, be routed through foreign bank accounts or clearing systems but in many cases the foreign or international link is more substantial with the debtor company having assets in different countries. If the debtor becomes unable to service its debts this gives rise to the possibility of a multiplicity of separate insolvency proceedings in the countries where the debtor has a ‘presence’, however defined. The greater the range of foreign ‘contacts’, the greater the number of possible insolvency proceedings. The multiplication of insolvency proceedings compromises the goals of insolvency law to achieve a collective forum for the administration and resolution of the debtor's affairs. There is the practical problem, however, of enforcing orders that relate to foreign assets and in getting third parties based overseas to cooperate in the enforcement of such orders.
The universalist ideal calls for a single forum to administer the debtor's affairs on a worldwide basis.Footnote 25 A single forum should cut down on cost and inconvenience and achieve greater parity in the treatment of creditors.Footnote 26 One US court has remarked that the centralization of insolvency proceedings ‘will frequently provide the optimal result for a debtor and its creditors alike by preventing certain creditors from gaining an advantage over others by virtue of differing judicial systems. A single primary proceeding also minimizes the time, expense and administrative burdens of managing full cases in multiple jurisdictions.’Footnote 27 It is a less easy task to decide where this single forum should be but perhaps the most obvious forum is the country where the debtor came into existence; in short, where the debtor is a company, the country of incorporation. If the company has formally changed domicile or registered office then the law of the new domicile or registered office should come centre stage. There are drawbacks, however, with this simple solution. The country of incorporation may be a so-called letterbox jurisdiction offering the facilities to incorporate but little more.Footnote 28 Even if a company has not been incorporated in a letterbox jurisdiction, the company may have minimal contacts with its country of incorporation and have its corporate headquarters and/or the bulk of its business operations located elsewhere. Practical and political reasons may preclude the possibility of restructuring or liquidation proceedings in the country of incorporation even though such proceedings on an objective basis would best serve creditor and other interests. Having insolvency proceedings in a country other than the country of incorporation may produce a greater alignment of debtor and creditor interests.
The European Insolvency Regulation confers jurisdiction to open main insolvency proceedings on the EU State where a debtor has its ‘centre of main interests’ (COMI).Footnote 29 There is a nod, however, in the direction of the country of incorporation by the statement of a presumption that the COMI is the same as the place of the registered office. The Regulation is a set of compromises and it makes some concessions to ‘territorial’ rather than ‘universalist’ notions of insolvency jurisdiction by allowing for the possibility of secondary insolvency proceedings in countries where the debtor has an ‘establishment’.Footnote 30 The ‘establishment’ concept signifies a place where the debtor carries out a non-transitory economic activity through human means and with goods. It clearly connotes something more than the mere presence of assets but obviously less than a ‘centre of main interests’.Footnote 31
One of the professed objectives of the EU Regulation is to stop forum shoppingFootnote 32 but its detailed provisions are not very successful in this regard. There is nothing to stop a debtor from making an eve of bankruptcy move of COMI to another jurisdiction so as to take advantage of a more favourable legal regime and to open insolvency proceedings there. On an operational company, rather than a holding company, level this may be difficult to accomplish.
The UNCITRAL Model Law on Cross-Border Insolvency is a less ambitious instrument than the EU Insolvency Regulation containing a more modest set of measures.Footnote 33 It does not directly allocate jurisdiction to open insolvency proceedings and national implementing legislation makes it clear that existing jurisdictional rules remain in place.Footnote 34 Nor does the Model Law contain mandatory uniform rules on conflict of laws. Rather it provides for the recognition of insolvency proceedings—whether main or secondary proceedings—but unlike under the Regulation, recognition of such proceedings is not automatic. It depends on application to the court. Moreover, the consequences of recognition depend in part at least on the law of the recognizing State, whereas under the Regulation insolvency, proceedings have the same effects throughout the EU as they have in the State that opens the proceedings. Supporters of the Model Law argue that it impliedly restricts forum shopping in that foreign insolvency proceedings will only be ‘fully’ recognized if they have been opened in a State where the debtor has its COMI.Footnote 35 Critics, however, point out that the concept of COMI is ‘fuzzy’ and subject to manipulation and there is nothing to prevent local courts from opening insolvency proceedings on a wide jurisdictional basis.Footnote 36
C. Forum Shopping in General
Forum shopping is often viewed in a pejorative light.Footnote 37 It is seen as undermining the principle of equal application of the law and involving unjustifiable advantage gaining by one party over another.Footnote 38 Nevertheless, if forum shopping is defined as the search by a plaintiff for the international jurisdiction most favourable to his claims, then the phenomenon must be accepted as a natural consequence which is not open to criticism.Footnote 39 For instance, in the Atlantic Star case Lord Wilberforce commented that it was natural and inevitable that a plaintiff would choose the place where he considers that his legitimate interests would be best advanced. He suggested that if the law of one country was more favourable than the law of another country, a plaintiff was not to be criticized for choosing the former.Footnote 40 Lord Simon said that this should be a matter neither for surprise nor for indignation.Footnote 41
In the US, Rehnquist CJ has remarked, without any criticism, on the litigation strategy of countless plaintiffs who seek a forum with favourable substantive or procedural rules or sympathetic populations.Footnote 42 Forum shopping has been described by one Federal appeals judge as a national legal pastime.Footnote 43 In the US context there has been a lively debate on domestic bankruptcy forum shopping and various, as yet unsuccessful attempts, to reform the ‘venue’ provisions of the US Code which currently allows bankruptcy proceedings to be filed where a debtor is incorporated; where it has its principal place of business or where an affiliate has already filed for bankruptcy.Footnote 44 While US bankruptcy law is federal law,Footnote 45 different bankruptcy courts in fact differ in their interpretation of particular Bankruptcy Code provisions; different courts adopt different procedural rules and some judges are more experienced in bankruptcy matters than others.Footnote 46 Since the so-called ‘great recession’ in 2007, empirical evidence suggests that about 70 per cent of large corporate bankruptcies are ‘forum shopped’ to a district other than where the debtor has its principal place of business.Footnote 47 The Southern District of New York and Delaware are the prime forum shopping venues. Critics argue that ‘rampant forum shopping undermines the perception and integrity of the bankruptcy system … The perception is that there are courts willing to give corporate debtors and other key decision makers the outcomes they seek’ and a debtor can simply choose the court that is most flexible. ‘This perception erodes public confidence in the bankruptcy courts and affects creditors, employees, unions and other constituents excluded from the perceived backroom dealings.’Footnote 48 There have been efforts in the US Congress to promote a Bankruptcy Venue Reform billFootnote 49 that would restrict venue choice in bankruptcy cases but these efforts have stalled in part it seems because of the of the strength of the Delaware lobby which has an influential advocate in the person of US Vice President and former Delaware Senator, Joe Biden. Mr Biden has argued that some bankruptcy courts develop specialized knowledge and experience and it is understandable for parties to want cases to be adjudicated in fora where they feel most comfortable.Footnote 50
Mr Biden's arguments can be translated into the international level and there is also the argument that creative competition among jurisdictions for the optimum set of insolvency law provisions will promote aggregate social welfare.Footnote 51 The existence of jurisdictional diversity creates the opportunity for competition among national legal orders and, on this analysis, the general welfare is maximized through the adoption of innovative rules at the national level and then giving parties a relatively free hand in selecting such rules to govern their relationships.Footnote 52 According to Lord Hobhouse, in a slightly different context, international commerce is best served ‘by encouraging the development of the best schemes in a climate of free competition and choice’.Footnote 53
There are, however, powerful counter-arguments centred around the proposition that national insolvency law contains a set of normative provisions that parties, or one party, should not be allowed to bypass by the exercise of contractual or jurisdictional choice. Insolvency law normally contains a mandatory set of provisions on, inter alia, operation of the debtor's business; treatment of existing contracts, avoidance of pre-insolvency transactions and priority among creditors. National insolvency laws differ on the emphasis placed on rehabilitation of the debtor over liquidation; on the ranking accorded particular creditors and on the conditions whether, and to what extent, creditors can be pressed into accepting a restructuring plan. The values that are, and ought to be, served by insolvency law, have excited a lot of debate and discussion among commentators.Footnote 54 In our fragmented world these values will bear different weights in different countries. If foreign parties are allowed to flock to the safe haven of US or even UK insolvency jurisdiction then there is a risk of undermining national policies that foreign countries consider important such as special protection for employees and/or the public purse. The Yukos caseFootnote 55 provides a good example of this where a Russian oil company was held entitled to file for bankruptcy protection in the US to stave off Russian tax demands—demands that would not be recognized in the US.
II. THE ATTRACTIVENESS OF THE UK AND US AS BANKRUPTCY FORUM SHOPPING VENUES
Both the UK and US may be attractive as bankruptcy and restructuring venues because of certain legal possibilities that are denied to companies in their home jurisdiction.
A. The UK
In the UK, there are two main insolvency procedures—liquidation and administration—and both of these procedures may be attractive to foreign companies for various reasons. Corporate restructuring may also be achieved by means of a scheme of arrangement under the Companies Act though the scheme of arrangement procedure may also be used by solvent companies particularly in a takeover context.Footnote 56
The UK liquidation procedure offers at least three attractions. First, the professionally qualified insolvency practitioner (liquidator) who takes charge of a company's affairs as part of the process is invested with special information gathering powers that facilitate the collection of company assets.Footnote 57 Second, the liquidator has power to bring ‘claw-back’ proceedings seeking the recovery of company assets that have been transferred away.Footnote 58 Third, the liquidator may also bring ‘wrongful trading’ proceedings seeking a contribution to company debts from directors who have failed to take every step with a view to minimizing loss to company creditors once they had realized that there was no reasonable prospect that the company would avoid going into insolvent liquidation.Footnote 59
Administration brings with it most of the same advantagesFootnote 60 but the procedure was designed with a different objective in mind.Footnote 61 An administrator is obliged to perform his functions with the objective of (a) rescuing the company as a going concern, or (b) achieving a better result for company creditors as a whole than is likely in liquidation.Footnote 62 In most cases administration leads to a sale of company assets to a purchaser who may carry on the original business in whole or in part through the vehicle of a new corporate entity, or it is used as a form of quasi-liquidation.Footnote 63 The ‘rescue’ objective is achieved in very few cases, in the sense that the original corporate entity continues to carry on business in a restructured form. For this to be a viable proposition the company may need to shed all or part of its debt burden whether through debt forgiveness; extending loan maturities or debt/equity swaps. Administration per se does not allow these results to be accomplished. Administration, however, may lead to a voluntary arrangement under the Insolvency Act or a scheme of arrangement under the Companies Act and these procedures permit the modification of creditor rights if a prescribed percentage of the relevant group of creditors agrees.Footnote 64
The liquidation and administration procedures also benefit from a statutory stay in that legal proceedings against the company, and executions against company assets, are subject to a moratorium.Footnote 65 The administration stay is wider in that it also bars actions for the enforcement of security. In neither case does the stay have extraterritorial effect for it does not extend to proceedings brought in foreign courts.Footnote 66 The UK courts, however, may restrain a party properly served in the UK from proceeding with an action brought in a foreign court.Footnote 67
Schemes of arrangement under the Companies Act do not necessarily involve an administration filing. Nor do they benefit from a statutory stay under the Insolvency Act though recently the court has fashioned a limited stay from the Civil Procedure Rules.Footnote 68 The scheme of arrangement procedure has proved its popularity as the restructuring vehicle of choice for large companies, and large corporate debt.Footnote 69 In effect it serves as a form of ‘debtor-in-possession’ restructuring. The procedure enables a company, irrespective of solvency, to enter into a compromise or arrangement with any class of creditors. The statute requires that a majority in number representing 75 per cent in value of the class of creditors affected must accept the scheme. Court sanction is also required and once these conditions are fulfilled, the arrangement binds abstainers or dissenters.
B. The US
While the US Bankruptcy Code contains a liquidation chapter in Chapter 7, its main attractiveness to foreign companies lies in the restructuring provisions of Chapter 11Footnote 70 where the statutory goal is the preparation and confirmation of a reorganization plan.Footnote 71 The US Supreme Court has described the objectives of Chapter 11 in the following terms:Footnote 72
In proceedings under the reorganization provisions of the Bankruptcy Code, a troubled enterprise may be restructured to enable it to operate successfully in the future … By permitting reorganisation, Congress anticipated that the business would continue to provide jobs, to satisfy creditors' claims, and to produce a return for its owners … Congress presumed that the assets of the debtor would be more valuable if used in a rehabilitated business than if ‘sold for scrap’.
Professors Warren and WestbrookFootnote 73 suggest that Chapter 11 deserves a prominent place in ‘the pantheon of extraordinary laws that have shaped the American economy and society and then echoed throughout the world … Based on the idea that a failing business can be reshaped into a successful operation, Chapter 11 was perhaps a predictable creation from a people whose majority religion embraces the idea of life from death and whose central myth is the pioneer making a fresh start on the boundless prairie.’
US bankruptcy law in general and especially Chapter 11 is particularly attractive to foreign forum shoppers for at least five reasons; (a) the worldwide automatic stay; (2) the debtor in possession norm; (3) the provisions for super-priority new finance; (4) the statutory ‘cramdown’ possibilities; and finally (5) the procedural consolidation possibilities.
First, a bankruptcy filing brings about an automatic stay, on enforcement proceedings against the debtor or its property and this stay has worldwide effect.Footnote 74 The US courts have inferred extraterritorial effect from the language of the Bankruptcy Code provisionsFootnote 75 and they have also held that the bankruptcy estate comprises property of the debtor wherever situated throughout the world.Footnote 76 Second, under Chapter 11 there is no automatic displacement of company management in favour of an outside trustee or administrator. Chapter 11 proceedings are normally begun by a voluntary petition filed by the corporate debtor. Chapter 11 is based on debtor in possession which means that the existing corporate governance structure remains in place notwithstanding the formal commencement of the restructuring process.Footnote 77 There is the possibility of management displacement in favour of an outside trustee but, in practice, this is confined to exceptional cases such as fraud.Footnote 78 The halfway house appointment of an examiner is also possible, but equally rare. The identities of individual managers or executives may change, however, in response to creditor pressure.Footnote 79 Third, Chapter 11 contains provisions for super-priority new finance that may allow an ailing business to survive and prosper. These provisions have proved something of a two-edged sword for existing management and shareholders. In practice a financier may be able to exert substantial control over the Chapter 11 process by means of provisions in agreements that provide for new finance and commentators have spoken of a new ‘Chapter 11’ with a greater emphasis on sales of the debtor's business as a going concern rather than on reorganizations in the traditional sense.Footnote 80 Ailing debtors need new finance to survive and the lender providing such finance can control the terms of the restructuring. This was done in the cases of the car manufacturers, Chrysler and GM, where the debtors' businesses were sold off to new operating companies, ‘new’ Chrysler and ‘new’ GM. In the Chrysler and GM cases the new lender was the US government and it was able to dictate the outcome of the Chapter 11 case by virtue of its new credit provider status.Footnote 81
Fourth, Chapter 11 contains a facility for ‘cramming down’ creditors, including secured creditors, into accepting a reorganization plan. If certain statutory conditions are fulfilled then the majoritarian principle prevails and holdouts among creditors can be overcome.Footnote 82 Finally, Chapter 11 allows for the procedural consolidation of insolvency proceedings involving several related companies and this offers the possibility of a coordinated group rescue for multinational enterprises whose activities are dispersed across several jurisdictions.
III. JURISDICTIONAL THRESHOLDS FOR INSOLVENCY FILINGS IN THE UK
The European Insolvency Regulation is directly applicable law and constrains the jurisdiction of the English courts to open insolvency proceedings. The Regulation only applies to debtors whose centre of main interests is in the EU.Footnote 83 If the debtor's COMI is outside the EU then the authority of the UK courts is unconstrained by European jurisdictional rules. As far as liquidation proceedings are concerned, the main jurisdictional pivot is then Part V of the Insolvency Act. This Part invests the court with jurisdiction to wind up companies incorporated outside the UK. Section 221(5) grants the court the authority to make a winding up order on various grounds including inability to pay debts. Once a UK winding up order is made it purports to have worldwide effect but it is possible for UK courts to assist foreign courts by treating any liquidation as ancillary to one that was taking place in the country's place of incorporation. This has the consequence that the powers of the UK liquidator are limited to gathering the UK assets, paying off preferential and secured creditors and then remitting any remaining assets to the principal liquidation.Footnote 84
Section 221 does not on its face fetter the discretion of the court to make a winding up order and a case could be advanced that there is no need to establish any UK connection before the discretion comes into play It has been held, however, that this view is too broad. In Banque des Marchands de Moscou v Kindersley,Footnote 85 Evershed MR observed:
As a matter of general principle, our courts would not assume, and Parliament should not be taken to have intended to confer, jurisdiction over matters which naturally and properly lie within the competence of the courts of other countries.
There has been a judicial concern that section 221 may interfere with the disposition by foreign sovereign powers of matters within their own territories. Therefore, some means must be found of controlling and channelling the discretion embedded in the section. Briggs J in Re Rodenstock GmbH Footnote 86 referred to the jurisdiction as ‘prima facie exorbitant’ and, all other things being equal, the appropriate forum for the winding up of a company was in its place of incorporation.Footnote 87 He also spoke of the practical purpose of ensuring that the court only made orders where some useful purpose would be served.
Many of the provisions in the Insolvency Act appear to be of unlimited territorial scope and if a transaction satisfies the statutory requirements, then prima facie, the provisions apply, irrespective of the situation of the property, of the nationality or residence of the other party, and irrespective of the law governing the transaction. Nicholls VC commented in Re Paramount Airways Ltd:Footnote 88
Parliament may have intended that the English court could and should bring before it, and make orders against, a person who has no connection whatever with England save that he entered into a transaction, maybe abroad and in respect of foreign property and in the utmost good faith, with a person who is subject to the insolvency jurisdiction of the English court…. Such an intention by Parliament is possible. But self-evidently in some instances such a jurisdiction, or the exercise of such a jurisdiction, would be truly extraordinary.
In Re Paramount Airways Ltd the court held that it would need to be satisfied that the party was sufficiently connected with England for it to be just and proper to make the order against him despite the foreign element. The court had a discretion and a ‘sufficient connection’ test was used to tailor the exercise of that discretion.
A ‘sufficient connection’ test has also been used as the overriding criterion for determining whether the court should make a winding up order in respect of a foreign company. In Re Drax Holdings Ltd Footnote 89 it was suggested that the ‘sufficient connection’ test went to jurisdiction and not to discretion. On the other hand, the jurisdiction to wind up a foreign-registered company is given by statute. As in the case of a domestic company, the jurisdiction need not be exercised as a matter of discretion. In respect of domestic companies, the petitioner is said to have a prima facie right to a winding up order once the statutory grounds are made outFootnote 90 but the court may exercise its discretion against winding up if, for instance, a majority of creditors in the same class oppose the making of the order.Footnote 91 There is no absolute entitlement to a winding up order and a fortiori the same holds true in relation to foreign companies where the ‘sufficient connection’ test mitigates against the risk of conflict with foreign authorities. In Re Real Estate Development Co Footnote 92 Knox J referred to a sufficient connection that would justify the court in setting in motion its winding up procedures over a body that was prima facie beyond the limits of territoriality The test can be criticized for being somewhat circular but it does enable a wide range of factors to be brought into the reckoning, including benefit to the petitioner whether through the presence of corporate assets in the UK or otherwise. Knox J also talked about a person or persons interested in the distribution of the assets being persons over whom the court can exercise jurisdiction.Footnote 93
Under the provisions of section 895 Companies Act 2006 dealing with schemes of arrangement between a company and its creditors the court has jurisdiction to sanction a scheme if the company is liable to be wound up under the Insolvency Act. The courts in cases like Re Drax Holdings Ltd Footnote 94 have applied the ‘sufficient connection’ test in respect of schemes of arrangement. In Re Rodenstock GmbH,Footnote 95 for instance, a sufficient connection with England was found to exist by virtue of the fact that the credit facilities extended to the company contained English choice of law clause and jurisdiction clauses and also by expert evidence to the effect that the relevant foreign courts would recognize the English court order.Footnote 96
A. The Sufficient Connection Test in Operation: Availability of Assets
In practice, the easiest way to establish a sufficient connection with the UK is establishing the presence of UK assets which can then be conveniently distributed to creditors. In Re Compania Merabello San Nicholas SA Footnote 97 a link was explicitly drawn between the discretion to make a winding up order and the functional purpose of the winding up. Megarry J said that it would normally be futile for a court to make a winding up order if there were no assets within the jurisdiction. There would be nothing to administer and it would be equally useless for the court to make a winding up order if there were no persons who had any interest in the proper distribution of the assets.Footnote 98 While the case suggests that the presence of assets was a precondition to the making of a winding up order, in the particular case the ‘assets’ requirement was satisfied only in a very attenuated form. A creditor had a breach of contract claim against the company but the company had taken out insurance in respect of the claim. If a winding up order was made the creditor would acquire statutory rights to claim directly from the company's insurer. This claim was payable in England and was the only asset of the company.
It seems clear, however, that the presence of assets is neither necessary nor sufficient for the making of a winding up order. An absolute requirement of the presence of assets would be arbitrary and could lead to the evasion of jurisdiction by the transfer of assets immediately prior to the institution of winding up proceedings. Moreover, as was remarked in Re Yugraneft Footnote 99 the fact that there is an asset in the UK to which the company lays claim was not automatically a reason for the court to exercise the winding up jurisdiction. The asset may be so small or too tenuous a connecting factor to justify UK winding up proceedings.
B. Sufficient Connection: Indirect Benefit to Creditors
In a number of cases the courts have held that ‘indirect benefits’ to creditors rather than the presence of assets per se justifies English winding up proceedings in respect of foreign companies. ‘Indirect benefits’ have taken the form of the following:
(a) The fact that English proceedings might result in asset recoveries that would not otherwise be achieved.Footnote 100
(b) The fact that the liquidator might succeed against the directors for fraudulent and/or wrongful trading under sections 213 and 214 Insolvency Act 1986: those directors being present in England and subject to the jurisdiction of the English court.Footnote 101
(c) The fact that a winding up order might enable unpaid employees to claim redundancy payments from the UK Employment Service.Footnote 102
(d) The fact that while the company was subject to insolvency proceedings in a foreign country, an English winding up meant that legal proceedings in England to which the company was a party were under the control of an insolvency practitioner who was familiar with English litigation as well as being an officer of the English Court and accountable to the court.Footnote 103
(e) The fact that there was no more appropriate forum to conduct a winding up because there was little possibility of a winding up in the place of incorporation. This was a factor in the Okeanos Maritime Corp case where the company had been incorporated in Liberia but did not carry on business there.Footnote 104
While the doctrine of forum non conveniens has been used in a positive way to assert jurisdiction on the part of the English courts, in other cases jurisdiction has been declined on the grounds that a winding up would be more appropriately conducted in another forum.Footnote 105 If there is a winding up in, for example, the company's place of incorporation where it carried on business, then the court may consider it more beneficial to creditors if there is no English winding up. This has the positive advantage of preserving the debtor's assets inasmuch as a proliferation of liquidations will deplete the company's necessarily limited resources. The forum non conveniens principle was applied in Re Harrods (Buenos Aires) Ltd Footnote 106 which concerned a solvent company registered in England but which traded in Argentina and with its assets located in Argentina. Under Argentine law a company was classed as an Argentine company if its principal activities were carried on in Argentina and thus the court concluded that Argentina was a more appropriate forum for a winding up.
The forum non conveniens principle was also considered in Banco Nacional de Cuba v Cosmos Trading Footnote 107 where the company was a Cuban state bank that had neither traded nor had offices in England for 20 years. It had done nothing to acknowledge the jurisdiction of the English courts and its only assets in England were shares in an English registered company. Scott VC suggested that a winding up order made whilst a company continues to trade in its country of incorporation was thoroughly undesirable. The winding up would not be ancillary to any foreign liquidation and nobody would recognize it. The only benefit for creditors from a winding up would be the public relations benefit of obtaining an order for payment but there was no practicable means by which such an order could be enforced. This benefit was much too light to outweigh the substantial reasons why the courts should not order winding up.
C. Foreign Companies and Administration Orders
Before the coming into force of the EU Insolvency Regulation the general view was that only companies formed and registered under the Companies Act could be the subject of UK administration proceedings. There was a minority view that this limitation did not make sense and that foreign registered companies which could be wound up under the Insolvency Act 1986 were also covered. A statutory amendment takes away whatever vestige of interpretive legitimacy attached to the minority view. The provision limits jurisdiction to Companies Act companies as well as non-UK EEA companies and foreign companies whose COMI is within the EU, excluding Denmark.Footnote 108 The ‘EU extension’ is there because otherwise there might be claims of unjustifiable discrimination if the administration mechanisms were open to UK companies but not to their EU counterparts.
The statutory amendment could be viewed as an illogical severing of the link with the liquidation jurisdiction. More seriously and practically, it can also be viewed as creating an obstacle to corporate restructuring and destroying both employment and businesses. The administration procedure is specifically designed to achieve the rescue of the business of a company as a going concern and to accomplish better returns for company creditors than could be achieved in liquidation. Administration is seen specifically as a rehabilitation tool and as producing more beneficial returns than liquidation. If liquidation is available on a certain basis to foreign registered companies, then administration should be available on a similar basis.
Essentially there are three interrelated arguments against exercising the winding up jurisdiction in relation to foreign registered companies. The first is practicality in that the winding up order may not be recognized abroad particularly where it continues to trade and carry on business in other countries. The second factor stems from incongruity of terminating the life of a company that owes its existence to the laws of another country. The third factor concerns the perceived interference with the sovereign authority of another State to deal with matters and legal persons within its own territory. These factors seem to militate less strongly against making administration orders since the process does not of itself involve bringing the existence of the foreign company to an end. The primary objective of the administration procedure is stated to be to give new business life to a company rather than terminating its existenceFootnote 109 though in certain cases achievement of the rescue objective may require the co-operation of governmental authorities in the country of incorporation.
IV. JURISDICTIONAL THRESHOLDS FOR INSOLVENCY FILINGS IN THE US
Unlike the position in the UK, in the US there is no distinction drawn between liquidation proceedings under Chapter 7 of the Bankruptcy Code and restructuring proceedings under Chapter 11. The same (low) jurisdictional threshold applies in both scenarios. Commentators have spoken of the tissue thin connection that suffices to found US Bankruptcy Code competence.Footnote 110
Section 109(a) of the US Bankruptcy Code provides that any person who ‘resides or has a domicile, a place of business, or property in the United States’ may be a debtor under the Code. This wide jurisdictional basis predates the 1978 Bankruptcy Code. For instance in a case from the 1930s that involved the well-known Italian boxer Primo CarneraFootnote 111 it was held that the boxer, who had a place of business in a hotel room in New York, could file under the US Bankruptcy Act even though he did not have a residence or domicile in the US.Footnote 112
In Re McTague Footnote 113 it has held that the court did not have a discretion to look beyond the language of section 109(a) and inquire into the quantity of property in the United States. Eligibility to be a debtor under the Bankruptcy Code was not determined by the amount of property in the US. Bankruptcy jurisdiction could be exercised on the basis of a single bank account in the US since the presence of a ‘dollar, a dime or a peppercorn’ provided a sufficient jurisdictional nexus. It has been that a shareholding in a US-incorporated subsidiary company constitutes property in the US and renders the company eligible for US bankruptcy protection. The US States courts may decline jurisdiction, however, if, for instance, a debtor is attempting to get around choice-of-forum clauses in his contracts with principal creditors.Footnote 114
Upon the commencement of a US bankruptcy case, the bankruptcy court has jurisdiction over all the assets of the debtor wherever situated. Section 541 of the Bankruptcy Code, in designating the property of the debtor that comprises the bankruptcy estate, states that it includes property ‘wherever located and by whomever held’ and it has been judicially affirmed that ‘Congress intended extraterritorial application of the Bankruptcy Code as it applies to property of the estate’.Footnote 115 By virtue of section 362, the automatic stay comes into effect barring any actions against the debtor and its property and again this applies on a worldwide basis. In Re Nakash Footnote 116 it was argued on behalf of a foreign receiver that sections 541 and 362 contained boilerplate and vague language that provided an insufficient basis upon which to infer extraterritorial application of the stay. The court concluded, however, on the basis of the applicable Code provisions, other indications of congressional intent as well as case law that the automatic stay applied extraterritorially. Foreign creditors taking action against the property of the debtor overseas may feel it politic to comply with the stay especially if they have assets or operations in the US that are liable to seizure in US contempt proceedings. To reinforce the message to creditors and others, the stay is sometimes backed up by a judicial restraining order, whether temporary or permanent. This has been described ‘as a prophylactic measure to apprise third parties of the existence and effect’ of section 362 of the US Bankruptcy Code.Footnote 117
On the other hand, if foreign creditors have little or no assets in the US they may find it convenient and appropriate to ignore the US stay and to institute insolvency proceedings in another State. This was the case in Re Cenargo Ltd Footnote 118 where a UK company filed for Chapter 11 bankruptcy protection in the US under the assumption that its principal secured creditor would be bound by the US stay. ‘Cenargo's belief was based on its understanding that Lombard had assets in the United States that the New York bankruptcy court could go against to enforce that stay. That belief turned out to have been erroneous.’Footnote 119 In violation of the stay, the secured creditor sought a UK administration order in respect of the company and the English court granted the order notwithstanding the US stay.Footnote 120
A. The Expansionist Scope of the US Bankruptcy Code
Re Cenargo Ltd involved a foreign shipping company and the long arm of the US bankruptcy jurisdiction is also illustrated by a recent series of Chapter 11 cases involving such companies. Such creditors have recognized the benefits and advantages served by Chapter 11 bankruptcy proceedings including the debtor in possession norm and the reach of the automatic stay. In some of these cases the US connections of the debtors have been rather tenuous. For instance, in the Marco Polo Seatrade caseFootnote 121 it was held that a retainer paid in advance of the bankruptcy filing to US counsel constituted property in the US sufficient to satisfy the Bankruptcy Code eligibility requirements.Footnote 122
The scope and power of US bankruptcy proceedings and the US automatic stay is also illustrated by the Yukos case.Footnote 123 The case involved Yukos, a Russian oil company whose business operations, including exploration and refining, were based in Russia. The US bankruptcy filing was made essentially in an attempt to prevent a seizure of the company's assets in Russia to satisfy a Russian tax debt. US bankruptcy jurisdiction was held to be established on the basis of bank account in the US opened shortly before the bankruptcy filing and on the presence of the debtor's chief financial officer in the US. The proceedings were later dismissed, however, on the basis of section 1112(b) of the Bankruptcy Code which allows dismissal of a case for cause, including the absence of a reasonable likelihood of achieving corporate restructuring. While the background to the Russian tax claim and the consequent US bankruptcy filing was a political dispute between the company controller and the Russian government, the court abjured reliance on the ‘act of state’ doctrine in dismissing the US proceedings.Footnote 124 The court also abstained from reliance on the seemingly self-evident proposition that the US was not a convenient forum.Footnote 125 The ‘totality of circumstances’ line of reasoning used by the court involved reference to a number of factors such as a very limited ability to implement a restructuring plan in the absence of cooperation from the Russian government; the transfer of funds to the US shortly before the bankruptcy filing; the attempt to subordinate the Russian tax claim and to upset the Russian scheme of creditor priorities by the use of US law and judicial structures; and also the fact that there were court proceedings in other countries including the possibility of accessing bankruptcy procedures in Russia.Footnote 126
The Yukos case involved the assertion of US bankruptcy jurisdiction over a company that another country might consider to be a national champion. The Avianca caseFootnote 127 involving Colombia's national airline is to the same effect. In fact, it is even more far reaching in that the US Bankruptcy court rather than dismissing the case ‘on the totality of the circumstances’ went on to confirm a restructuring plan. The company was eligible to file under the US Bankruptcy Code because it had both property and a place of business in the US including aircraft parts and other equipment in Miami, and an office in New York City. The US court felt confident enough to confirm a restructuring plan because Avianca's largest creditors were participating in the case or were otherwise subject to US jurisdiction. In the court's view, the interests of creditors would not be best served by dismissal of the case.Footnote 128 In coming to this conclusion, it referred to the presence of creditors; the power of the court to exert judicial control over them, and the willingness of other creditors to submit to the jurisdiction of the court.Footnote 129 With one or two exceptions, Colombian creditors had generally respected the stay that came into effect upon the commencement of the US bankruptcy case even though they had no substantial contacts with the US and therefore were outside the effective de facto reach of the US bankruptcy court.
Somewhat more controversially, the court said that this was not a case where the foreign debtor had manipulated its place of filing or attempted to evade its creditors, either to take advantage of the fact that the US left management in possession of the debtor; to benefit from different priority principles or to obtain another perceived legal advantage. The court also considered, but rejected, the argument that it was unseemly for the US courts to take sole jurisdiction over the Avianca restructuring since the company had its centre of main activities or interests abroad. The court dismissed this proposition as largely theoretical stating that ‘an ideal or even in an orderly world, governing law might require a filing in one jurisdiction, presumably the jurisdiction where an international enterprise had its principal place of business or “center of main interests”’. In short, the court said that the present world was not an ideal world.Footnote 130
The assertion of jurisdiction by the US court in Avianca has been criticized.Footnote 131 Cases like Avianca and Yukos throw up practical problems for foreign creditors in that they are obliged at considerable personal cost and inconvenience to enter the US courtroom to challenge the jurisdictional choice made by the debtor. If the jurisdictional threshold was higher, this would reduce the risk of inappropriate proceedings being filed. While the court in Avianca Footnote 132 acknowledged that consent is often a critical factor in determining the proper scope of the US bankruptcy court's jurisdiction, foreign creditors may have little choice but to participate in the US proceedings due to the worldwide scope of the automatic stay and the risk of US sanction for failing to heed the stay. Consent may in practice be effectively coerced. Moreover, once a US bankruptcy case commences it develops a momentum of its own with so-called ‘first day’ orders that may require payment of certain creditors.Footnote 133 The effect of such orders is to create constituencies that favour the continuation of the Chapter 11 case. A creditors' committee may be appointed and the committee may engage lawyers and financial advisors who become active in the case. In the Avianca case it was remarked that the ‘Committee (and perhaps its professionals as well), not wishing to see their role come to an end with the dismissal of the case, appeared in vigorous support’ of the US Chapter 11 proceedings.
The US in Chapter 15 of the Bankruptcy Code has implemented the UNCITRAL Model Law on Cross-Border Insolvency and the Avianca result appears to be particularly anomalous in this light. Under Chapter 15 foreign main proceedings, and a prima facie stay on actions against the debtor, will only be recognized if they originate in a jurisdiction where the debtor has its centre of main interests. US courts themselves, however, will open main insolvency proceedings in respect of a debtor on the basis of a substantially lesser connection. Is this not Janus-like? The effect of the UNCITRAL Model Law will now be considered.
V. EFFECT OF THE UNCITRAL MODEL LAW
Both the UK and US have implemented the Model Law—the former through the Cross-Border Insolvency Regulations 2006 and the latter through the new Chapter 15 of the US Bankruptcy Code introduced by the Bankruptcy Abuse Prevention and Consumer Protection Act 2005.Footnote 134 The Model Law was designed to improve the real world administration of the cross-border insolvency case. The Law provides inter alia for the recognition of foreign main insolvency proceedings defined as proceedings commenced in a jurisdiction where the debtor has its centre of main interests. There are consequences flowing from the recognition of foreign main proceedings— an automatic stay on individual proceedings against the debtor's assets; a stay on executions against the debtor's assets and thirdly, the right to transfer, encumber or otherwise dispose of any assets of the debtor is suspended.Footnote 135 The domestic court, however, upon recognition may modify these consequences and it may also grant further discretionary relief.Footnote 136
Article 28 of the Model Law provides that once foreign main insolvency proceedings have been recognized, local insolvency proceedings may only be opened in respect of the debtor if the latter has assets within the particular jurisdiction and the effect of the local proceedings is confined to those assets. In the Cross-Border Insolvency Regulations 2006 (CBIR),Footnote 137 the UK has qualified the full force of the principle reflected in Article 28. Local insolvency proceedings opened after foreign main insolvency proceedings have been recognized under the CBIR are limited to assets in the UK but there is no restriction on the jurisdictional base for opening such proceedings.Footnote 138 Effectively, the position under existing law is preserved and this allows a foreign company to be wound up in the UK where there is ‘sufficient nexus’ with the UK. As the Insolvency Service points out the concept of nexus ‘encompasses more than just the presence of assets and extends to (among other things) the presence of creditors: it also permits consideration of whether a liquidation in the jurisdiction would be of benefit to UK creditors’.Footnote 139 The US has actually been more faithful to the spirit of the Model Law in its implementation of Article 28. Section 1528 of the US Bankruptcy Code now provides that after recognition of a foreign main proceeding, a full plenary bankruptcy case under Chapters 7 or 11 of the Code may be commenced only if the debtor has assets in the US. Moreover, the effects of such a case are generally restricted to the assets of the debtor that are within US territorial jurisdiction.
It is submitted that the Model Law provisions provide at best only a partial palliative to a creditor who is dissatisfied with the decision to open full US bankruptcy proceedings in respect of a foreign debtor. Not much has changed in this respect from before. Before implementation of the Model Law the creditor could go to the bankruptcy court and try to have the US proceedings dismissed either on the basis that the Chapter 11 filing had been made in bad faith or that restructuring efforts were doomed to failure in the absence of a substantial measure of creditor consent. With the new Model Law regime, the creditor could try to institute foreign insolvency proceedings in respect of the debtor and then apply to have these proceedings recognized under Chapter 15. The creditor could then apply for dismissal or suspension of the US case under section 305 of the Bankruptcy Code. Section 305 permits this if the purposes of Chapter 15 ‘would be best served by such dismissal or suspension’. The creditor is faced with the time, cost and inconvenience of taking all these steps and then has to confront the hurdle presented by the fact that the passage of time will have generated momentum that supports continuation of the US case. First day orders may have been made; creditors' committees appointed; lawyers engaged; debtor-in-possession financing arrangements put in place; certain creditors paid off and perhaps steps taken in the formulation of a restructuring plan that is congruent with the requirements of Chapter 11. Some, or all, of these events may need to be unravelled if the US proceedings are to be dismissed or suspended. The unravelling process may not be easy especially since the very opening of the US proceedings has the effect of creating constituencies that support the US-centred solution to the company's financial difficulties. Some of the difficulties in the unravelling process are illustrated by Re Cenargo Ltd Footnote 140 where it took a groundbreaking judge-to-judge conference call between the US and UK courts to resolve the impasse over different courts exercising insolvency jurisdiction over the same entity.
VI. CONCLUSION
Both the UK and US offer certain attractions as bankruptcy forum-shopping venues. The law in both countries provides restructuring as well as liquidation alternatives though the UK administration procedure is effectively closed to foreign forum shoppers who are neither registered in an EEA country nor have their centre of main interests in the EU except Denmark.Footnote 141 Foreign companies may, however, restructure their debt by means of schemes of arrangement under the UK Companies Act. Schemes in respect of foreign companies may be approved and implemented in the UK if the company is deemed to have a sufficient connection with the UK. The test is the same for the exercise of the winding up jurisdiction in respect of foreign companies under section 221 of the Insolvency Act though it may play out differently in the different contexts. The limited scope of administration is anomalous since the policy arguments against restructuring foreign companies seem less strong than the policy arguments against liquidating them. It is especially anomalous since one of the avowed objectives of the administration procedure is to serve as a more convenient alternative to liquidation. It also detracts from the appeal of the UK as the bankruptcy venue of choice for foreign companies and hits out at ‘invisible imports’ in this regard.
The US has no such compunctions about serving as a restructuring forum for foreign companies. The jurisdictional threshold under the US Bankruptcy Code for both liquidating and restructuring foreign companies is quite low and is satisfied by the presence of minimal assets in the US. A US place of business is also sufficient to invoke the Bankruptcy Code jurisdiction. The criticism of US law is rather different than the criticism of UK law. The main criticism is one of hypocrisy in that under Chapter 15 of the Bankruptcy Code US courts will only recognize foreign main insolvency proceedings if they emanate from a jurisdiction where the debtor has its centre of main interests. Nevertheless, the US courts themselves will open US main bankruptcy proceedings in respect of a foreign based debtor even though the debtor's contacts with the US are quite limited. This asymmetry is difficult to justify. Moreover, if foreign companies are allowed to file for bankruptcy in the US then this runs the risk of undermining policies considered important by the relevant foreign country such as the priority given to tax or employee claims under local law. The worldwide effect of the automatic stay consequent on the opening of US bankruptcy proceedings coupled with the global economic reach of the US means than foreign creditors can ill afford to ignore the US proceedings. In a multipolar world the lodestar of US bankruptcy jurisdiction casts an anomalous light.
