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The trade and investment relationship between the UK and the US is one of the strongest in the world. The ties between the countries exist through history, language, culture and shared business values. However, despite the commonality and the will to make trade relationships and businesses work, sometimes things go wrong.

what happens when things go wrong?

Recovery specialists are confronted with a swarm of international creditors competing for satisfaction. They are left to negotiate language barriers, cultural pitfalls, legislative anomalies and jurisdiction shopping which inevitably leads to delay and increased costs to the estate, eating away at the dividends available for the creditors. This was due to there being no single framework to co-ordinate insolvency proceedings in the various jurisdictions.

Why are creditors treated differently?

Businesses can fail anywhere, but they are treated differently in different countries. The US favours the company; the French protect the employees; the British, the creditors. China is currently finalising insolvency legislation modelled on UK law thus tending to favour creditors; other Asian countries are moving to the US Chapter 11 model of debtor protection. The tug of war caused by the cultural divergence between the attitudes towards failing businesses and bankruptcy models of debtor and creditor protection will continue. The fundamental issue of which jurisdiction will run the insolvency proceedings, and which legal system will prevail, can make a difference to a creditor’s chances of getting its money back.

The Model Law

The United Nations, through its Commission on International Trade Law (UNCITRAL) has sought to bring order through its Model Law on Cross Border Insolvency (“the Model Law”). The Model Law seeks to achieve recognition and co-operation between diverse regimes. It provides a framework for more effective cross-border insolvency handling, specifically where the debtor has assets or creditors in more than one country. The aim of the Model Law is to cut uncertainty and cost from cross-border insolvencies by defining up front which country will administer a business wind-up or reorganisation.

What does this mean for investors and companies?

Multi-national companies and investors with cross-border dealings will benefit significantly from understanding how the Model Law works. The Model Law will help investors to make informed choices when deciding whether to invest in, or lend to, foreign companies as they will have better clarity on their exit strategies.

What is the Model Law?

The Model Law does not attempt to harmonise local insolvency law. The main issues addressed by the Model Law include recognition of foreign proceedings, co-ordination of proceedings concerning the debtor, rights of foreign creditors, rights and duties of foreign insolvency representatives and co-operation between authorities in different countries. Since the Model Law is not binding on any country, its operation depends on how it is enacted locally. The certainty is the main reason it is backed by large global institutions such as the World Bank, IMF, Asian Development Bank and G22.

Enactment in the US

In April 2005, President Bush signed into law the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, (effective 17 October 2005). Included among the many changes to the US Bankruptcy Code were the extensive provisions governing the administration of cross-border insolvency proceedings to introduce the Model Law. These provisions were embodied in a new Chapter 15 which replaced section 304 of the US Bankruptcy Code.

Enactment in the UK

On 4 April 2006, England, Wales and Scotland adopted the Model Law in the form of the Cross-Border Insolvency Regulations 2006. Like Chapter 15, the UK Regulations adopted the Model Law with some modification, but have stayed close to the original drafting in order to ensure consistency, certainty and harmonisation with other countries enacting the Model Law. This should also demonstrate to other nations the US and UK’s allegiance to the cause of improving the machinery of international co-operation, both in the interests of preserving value for creditors and in the hope of improving the prospects of rescuing companies.

At the time of writing legislation based on the Model Law has been introduced in Eritrea, Japan, Mexico, Montenegro, Poland, Romania, Serbia, South Africa, and the British Virgin Islands. New Zealand and Australia are expected to adopt it shortly. India is considering its adoption. Whether the principal European powers will follow suit remains to be seen.

Determining the Company’s “Centre of Main Interest” (COMI)

On 31 May 2002, the EC Regulation on Insolvency Proceedings came into force. The Regulation (which does not apply in Denmark) like the Model Law was intended to improve the efficiency and effectiveness of insolvency proceedings with an EU cross-border element. The European courts have considered the meaning of COMI in the EC Regulation and those deliberations will be relevant to the interpretation of the Model Law. Those dealing with a company in financial difficulties will need to consider where a company’s COMI lies, as this may be crucial in co-ordinating the restructuring because it will determine which country’s law applies to the insolvency or restructuring.

Practitioners in Europe awaited guidance from the European Court of Justice (“ECJ”) in Eurofood IFSC Limited. The decision in May 2006 was far from enlightening. The meaning of “COMI” still lacks clear definition, and practitioners must still look to the decisions of national courts for guidance as to what factors should be taken into account in determining a company’s COMI.

Guidance on COMI from the US

There have been approximately 30 cases to date under Chapter 15. The cases to date come from Canada, England, Korea, Bermuda, Germany, Japan, the Netherlands, Singapore, France, Russia, and the Cayman Islands. In a recent Chapter 15 case, Mr Justice Robert Drain (sitting in the Southern District of New York) held that strategic attempts to establish that main proceedings exist will not be automatically rubberstamped by the court. The court refused to grant the liquidator’s application for proceedings in relation to Cayman hedge funds to be recognised as main proceedings.

However, it did recognise them as non-main proceedings. The companies had no business in the Cayman Islands beyond what was necessary for regulatory and money laundering requirements. It was clear that the liquidator wanted recognition as main proceedings in order to benefit from the automatic stay and to buy time in relation to a litigation settlement. The US court appeared to give support to the head office test approved by the Advocate General in his opinion in Eurofood, but which was not commented on in the final decision by the ECJ.

Conclusion

The concept of COMI will continue to be further debated across Europe, the US and the Asia /Pacific region. Will there be any consistency in approach? Although the UN has tried to bring harmony to the process, arguments remain a certainty. The biggest concern is that because the COMI concept is not precisely defined, creditors will still try to argue that proceedings should take place in the jurisdiction that best suits them. The US and the UK at least have the same basis of approach which will still make both countries attractive environments for international restructuring but global uniformity is perhaps still a distant dream.

Deborah Jenkin Jones and Ian Williams are partners in the Business Restructuring Department of Geldards LLP - Email: ian.williams@geldards.co.uk

www.geldards.com

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