THE NEW THREAT TO INTERNATIONAL COMMERCIAL TRANSACTIONS: CROSS-BORDER INSOLVENCY AND ITS IMPACT ON THE STANDBY LETTER OF CREDIT REGIME

By Roland Lechner

Lurking in all transnational bankruptcies is the potential for chaos if the court involved ignores the importance of comity. As anyone who has made even a brief excursion into this area of insolvency practice will report, there is little to guide practitioners or the judiciary in dealing with the unique problems posed by such bankruptcies. Yet it is critical to harmonise the proceedings in the different courts lest decrees at war with one another result.

- Judge Tina L. Brozman[1]

I. INTRODUCTION

The main purpose of the letter of credit regime is to facilitate the purchase and sale of goods by providing assurance to the seller [beneficiary of LC] of prompt payment upon compliance with the conditions in the document without the sellers having to rely on the solvency of the buyer [applicant of LC].[2] In the case of a standby letter of credit, the letter of credit obligates the issuing bank to honor the credit upon evidence of the beneficiary’s performance and upon evidence or mere declaration of the applicant’s default in the underlying contract.[3] The insolvency of the applicant, especially if it is a multinational company, or the issuing bank in this tripartite relationship[4] has potentially dire consequences and the creditor of the bankrupt party might face the possibility of partial or complete loss of its claim.

The uncertainty inherent to the insolvency of multinational companies and credit institutions is due to the fact that the international community has so far failed to draft binding legislation for a uniform procedure dealing with this occurrence. In the aftermath of the disastrous consequences of the Herstatt[5] and BCCI[6] cross-border insolvencies on the global economy, several efforts have been made to provide for effective guidelines to coordinate multinational defaults. The most promising of these efforts to date on a global level culminated in the UNCITRAL Model Law on Cross-Border Insolvency.[7] However, Model Laws are not binding per se, and each jurisdiction is vested with discretion as to what extent it will incorporate the provisions of the Model Law into its respective national bankruptcy laws.[8]

Domestic insolvency laws are often deeply rooted in each country’s societal values and public policies, which explains why the most effective agreements regarding cross-border insolvencies have been accomplished through bilateral treaties and regional conventions.[9] A good example of such a regional agreement is the European Council Regulation on Insolvency Proceedings[10] (EC Regulation) which entered into force on May 29, 2002 and provides a comprehensive set of conflict-of-law rules for cross-border insolvencies within the Member States of the European Union (EU). Although the EC Regulation is merely regional in scope and does not apply to business entities outside the EU jurisdictions, it nevertheless constitutes a valuable guideline for a similar legislation with global application.

In the absence of an international regime on cross-border insolvency, the bankruptcy of multinational companies is likely to involve separate insolvency proceedings in each of the countries in which the insolvent company had subsidiaries, offices or assets. Since domestic insolvency laws vary significantly, such multiple proceedings can lead to conflicting and incompatible results and could severely impair the proper reorganization or liquidation of the insolvent company. Additionally, without a uniform framework providing binding conflict-of-law rules, the uncertainty as to which country’s law is applicable to each insolvency proceeding would defeat the purpose of the letter of credit regime which is designed to provide the parties to a letter of credit transaction with the guarantee that the obligations arising from the underlying contract will be honored.

The jurisdictional aspects involved in the default of a multinational bank are even more complex as in the case of a multinational corporation because all the above-mentioned international and regional agreements on cross-border insolvencies exclude credit institutions from their scope and application.[11] The reason for this special treatment of financial institutions can be explained by the complexity of the matter of bank insolvencies and by the divergent interests and overlapping national competencies involved.[12] Eva Hüpkes, the Head of Regulation in the Legal Department of the Swiss Federal Bank Commission, points out that “devising a legal framework for bank insolvency is already complicated on a national level, with the various authorities involved – regulatory, supervisory, and judicial – the complexity is even greater in an international context.[13] The interest of the competent national authorities to exclusively determine the course of insolvency proceedings involving financial institutions within their jurisdictions stems largely from the systemic implications for the national economies and banking systems that these proceedings will entail.[14]

This Note will focus on the insolvencies of multinational banks issuing standby letters of credit as well as the insolvencies of multinational companies applying for standby letters of credit and the respective implications of their defaults on the letter of credit regime. Part II discusses the applicable sources of jurisdictions and general principles pertaining to cross-border insolvencies. Part III analyzes the implications of conflicts of laws on the recourse available to an issuing bank of a standby letter of credit against the insolvent company that applied for the LC. Part IV discusses the recourse that the beneficiary of a LC will be able to seek against an issuing bank which became insolvent before honoring the letter of credit. Part IV will then conclude with suggestions of how the international community can deal more effectively with cross-border insolvencies in the context of letter of credit transactions.

II. JURISDICTIONAL ASPECTS AND GENERAL PRINCIPLES OF INTERNATIONAL INSOLVENCY

The most immediate task following the default of a multinational credit institution is to determine which country actually has jurisdiction over the insolvency proceeding.[15] There are four different sources of jurisdiction: the law of the creditor’s country of residence (lex domicilii), the law of the debtor’s country of residence (lex domicilii), the law of the country where the transaction occurred (lex loci contractus), and the law of the country with subject-matter jurisdiction over the assets (lex situs).[16] The possibility also exists that a fifth source of jurisdiction comes into play, which would grant jurisdiction to the country where the insolvency proceeding were opened (lex concursus).[17] However, the country with jurisdiction in accordance with lex concursus is very likely to have jurisdiction under any of the other four sources of jurisdiction.[18]

The choice of forum and the choice of law are intertwined in the area of international insolvency because no court will conduct bankruptcy proceedings pursuant to the laws of another jurisdiction.[19] Whether a jurisdiction follows a particular principle will determine if a cross-border insolvency should be administered in a single forum or multiple fora. Thus, the principles of international insolvency are not only outcome-determinate as to forum-selection, but they are also outcome-determinative regarding the selection of applicable. There are three main principles applicable to cross-border insolvencies: the territoriality principle, the universality principle, and the principle of modified universalism.

The territoriality principle does not recognize the extraterritorial effect of a foreign court’s judgment,[20] but rather it advocates that the “law of any country is applicable only to assets or persons physically subject to that [country’s] law.”[21] The underlying purpose contemplated by the principle is that the seizure of the debtor’s assets located within the borders of a country benefits domestic creditors regardless of whether a parallel foreign proceeding exists.[22] The territoriality approach is often referred to as the “grab rule”[23] because the local court takes the assets located in its geographic jurisdiction and distributes them only to those creditors who come to the court to present their claims.[24] There are several disadvantages to the territorial approach. First, foreign creditors are not treated as fairly as local creditors because in most cases they are being given late notice of the initiation of insolvency proceedings abroad. Foreign creditors also often have difficulty informing the foreign court of the existence of their claims.[25] Second, the territoriality principle might lead to inconsistent and sometimes inequitable result for creditors of the same estate because different jurisdictions have different avoidance and priority rules.[26] Thirdly, a debtor may elect to transfer local assets to another jurisdiction to favor creditors located there. Considering the difficulties inherent to a local creditor’s entrance into a foreign jurisdiction to protect his interests, such preferential transfers might prevent the local creditor from receiving any share of the debtor’s assets.[27] Finally, each jurisdiction under the territorial approach will seek the best possible outcome for local creditors, and this inevitably creates a conflict of interest with the claims of foreign creditors.[28]

Under the universality principle, a single forum administers all the debtor’s assets and makes distributions to creditors, wherever they are located and in accordance with the forum state’s substantive bankruptcy laws.[29] The single forum is typically the court with principal jurisdiction over the debtor and may be the country in which the company is incorporated, the country in which the company is headquartered, or the country in which the company has the bulk of its operations or assets.[30] All other jurisdictions are obligated to assist the court with principal jurisdiction and to recognize and enforce its orders.[31] Contrary to the territoriality principle, the universality approach distinguishes between the main insolvency proceedings and secondary insolvency proceedings.[32] These ancillary proceedings or local proceedings are auxiliary in nature and designed to assist the main proceeding in administering the assets, i.e. by turning over local assets to the main proceeding.[33]

The advantage of the universality principle is that all assets are administered and distributed by a single forum, thereby preventing unequal treatment of similarly situated classes of creditors (par conditio creditorium) and reducing the strategic importance of preferential transfers across borders.[34] However, the universality principle also has several flaws. First, the country with jurisdiction over the main proceeding will not be able to ensure the enforcement of its orders abroad by unilaterally embracing the universality principle.[35] A foreign court’s order will only enjoy full effect abroad if the other jurisdictions also recognize the principle.[36] Second, problems always arise when foreign law dictates the resolution of domestic affairs, such as the distribution of local assets, unless the substantive laws of the jurisdictions involved are largely identical.[37]

While both the universality and the territoriality principle have almost never been unequivocally implemented in their pure form,[38] many domestic courts have consistently applied the principle of modified universalism in cross-border insolvencies.[39] Under modified universalism, the forum hosting the primary proceeding, while seeking to achieve the broadest extraterritorial effect possible of its orders, leaves open the possibility of cooperation with secondary proceedings commenced in another jurisdiction.[40] In other words, the court with jurisdiction over the main proceeding will seek the assistance of the jurisdiction where the debtor’s assets are located, sometimes insisting that its own substantive insolvency rules should be applied in the foreign proceeding.[41] Contrary to pure universalism, the modified form makes cooperation between the primary and secondary proceedings discretionary. Therefore, courts with jurisdiction over secondary or territorial proceedings can better ensure that local creditors will not be unfairly treated under foreign insolvency laws and proceedings.[42]

III. THE IMPLICATIONS OF CROSS-BORDER INSOLVENCIES ON AN ISSUING BANK’S CLAIMS AGAINST THE INSOLVENT APPLICANT OF A LETTER OF CREDIT

The following scenario is the basis for the discussion in this section: On July 9, 2002, the German steel company Metallwaren AG enters into a contract with the French car manufacturer Encore which provides for the sale of hot-rolled steel. Subsequent to the execution of the contract, Encore requested the local branch of Global Bank in Nice to issue a standby letter of credit with the German company as beneficiary. After Encore provided the Global Bank with a security interest in its inventory located at manufacturing plant in Manchester sufficient to cover the letter of credit, the bank issues the letter of credit to the German company on July 15, 2002. Metallwaren AG delivered the steel timely on August 21, 2002. Encore defaulted on its payments as required by the contract on September 18, 2002. Metallwaren AG granted Encore seven days in which to cure the default, but to no avail. On October 7, 2002, Encore declared that it is unable to pay its debts (cessation des paiements). On October 10, Metallwaren AG demanded that the bank honor the letter of credit and Global Bank paid Metallwaren AG the entire sum of €150,000 as provided in the document. Encore is incorporated in France, is headquartered in Paris, maintains manufacturing plants in Manchester, England and Modena, Italy, and has administrative offices in Frankfurt and Vienna. Most of Encore’s business is being channeled through their German office in Frankfurt. Furthermore, Encore has assets in the United States and the Netherlands. The letter of credit was issued in Nice and the contract between Metallwaren AG and Encore was signed in Frankfurt.

Since May 29, 2002, the EC Regulation is applicable to the scenario described above. The EC Regulation is not designed to create a uniform set of substantive insolvency laws among the Member States.[43] Rather, it is designed to introduce common conflict-of-law rules that provide certainty to multinational business entities, which have their “centre of main interest” within the EU, regarding the applicable law in insolvency proceedings.[44] Further, every creditor, who has his habitual residence, domicile, or registered office in any of the Member States, will have the right to lodge claims in all insolvency proceedings relating to the debtor’s assets.[45] The provisions in the regulation pertaining to the determination of which Member States’ courts will have jurisdiction over an insolvency proceeding combine elements of both the territoriality and universality principle.[46]

The EC Regulation provides for two types of insolvency proceedings, namely main proceedings with universal scope and secondary proceedings with a territorial scope.[47] The courts of the Member State where the debtor has its “centre of main interest” will have jurisdiction to open the main proceeding.[48] The main proceeding will have universal effect, regarding any assets of the debtor, no matter where they are located, with the exception of assets located in a jurisdiction where a secondary insolvency proceeding has been opened.[49] The applicable law, throughout the EU for main insolvency proceedings, will be the law of the Member State where such main proceedings commence and will cover such aspects as set-off, powers of liquidators, or the distribution of assets.[50] Considering the wide applicability of the law of the Member State with jurisdiction over the main proceedings, the determination of where the main proceeding will commence is the crucial stage during the insolvency process of a multinational company.

Although the regulation does not contain a provision defining “centre of main interest”, the regulation provides that there is a rebuttable presumption that the registered office constitutes the centre of main interest.[51] A showing that the debtor conducts the administration of his interests on a regular basis in another Member State and this administration is ascertainable by third parties can defeat this presumption.[52] A recent decision issued by a British court already addressed the meaning of “centre of main interest”. In Re Enron Directo, SA, the court stated that the presumption that the main proceedings should be where the company’s registered office is located was rebutted on evidence that the management decisions of the company were taken at a different office.[53] Determining the “centre of main interest” might prove to be particularly difficult in the case of unincorporated associations because, very often, there will be no statutory seat and a center of main interests is either changing or not easily determinable.[54] Ultimately, the European Court of Justice will probably be approached to provide a specific definition of “centre of main interest”.[55]

Courts in Member States will have jurisdiction over secondary proceedings if the debtor has an “establishment” in that Member State and this jurisdiction can only be exercised over the debtor’s assets situated in the territory of that state.[56] “Establishment” is defined to mean “any place of operations where the debtor carries out a non-transitory economic activity with human means and goods.”[57] Consequently, the mere presence of assets by the debtor would not provide the courts of a Member State with jurisdiction to open secondary proceedings. The distribution of these assets would be governed by the laws of the Member State with jurisdiction over the main proceeding. Regardless of the type of the main proceeding, the secondary proceeding may only take the form of a winding-up proceeding.[58] Once the main insolvency proceeding commences, the courts opening secondary proceeding are not required to re-examine question of the debtor’s solvency.[59] It is important to note that the term “establishment” does not include the debtor’s autonomous subsidiaries in other Member States. The insolvency proceedings regarding these subsidiaries remain to be governed by the law of the Member State in which they have been incorporated.[60]

Under the present hypothetical, Encore will be presumed to have its centre of main interest in France because it is registered in France and is headquartered in Paris. However, creditors in Germany might be able to overcome this presumption by showing that most of Encore’s management decisions were conducted at the office in Frankfurt. Depending on whether French or German insolvency law will be determined to govern the main proceeding is of utmost importance, especially regarding the treatment of preferential transfers. Under French law, any transfer made between the date the debtor was effectively unable to pay its debts (cessation de paiements) and the date of the judgment initiating the insolvency proceeding[61] is subject to cancellation if certain conditions are met.[62] Additionally, a French court may declare null and void any transfer made during the six-month period prior to the “suspicious period” if the transfer was detrimental to the creditors’ debtors and the benefiting creditor was aware of the debtor’s situation.[63] Conversely, under German insolvency law a transfer that enabled a creditor to obtain satisfaction or a security interest is voidable if the transfer occurred within the three-month period before the filing of the petition for insolvency, the debtor was illiquid, and the creditor knew of such illiquidity.[64] Therefore, the determination of applicable law will significantly influence assets available for distribution among the creditors during the insolvency proceeding. For the purpose of the following discussion, this Note will assume that the French court will have jurisdiction over the main proceeding.

According to the provisions of the EC Regulation, Encore faces a main proceeding in France and the possibility of secondary insolvency proceedings in Germany, England, Austria, and Italy. In attempting to collect the amount paid under the standby letter of credit, Global Bank has to decide in which insolvency proceedings it wishes to participate. The advantage of pursuing insolvency litigation in France is that the judgment of the French court will not only be enforced against Encore’s assets located in France but also those located in the Netherlands. The case of the assets in the United States is different because the provisions of the EC Regulation are not applicable to them and the creditors must attempt to enforce the French judgment in accordance with relevant provision of the United States Bankruptcy Code.

If Global Bank elects to open a bankruptcy proceeding in France, it can file a request as soon as Encore declared that it is unable to pay its debts.[65] This request commences the so-called “observation period” (periode d’observation) during which the French court will initiate the bankruptcy proceeding and determine whether liquidation or reorganization is the appropriate measure for the insolvency proceeding.[66] When the reorganization measure seems impossible or inappropriate to the debtor’s business, then the French court may directly initiate a liquidation proceeding without an observation.[67] Instead of requesting a main proceeding in France, Global Bank has furthermore the choice of requesting secondary proceedings in Germany,[68] Austria,[69] England[70] or Italy[71] at any time after the main proceeding has commenced.

Additionally, under the EC Regulation, Global Bank can request the opening of a secondary proceeding in a Member State before the opening of a main proceeding if Global Bank has a registered office in that Member State where the claim arises from the operation of the debtor’s establishment.[72] However, since the standby by letter of credit transaction was conducted in France, this special provision is not applicable to the present case. The only other avenue to open a secondary proceeding before the commencement of the main proceeding is for Global Bank to show that the main insolvency proceeding cannot be opened because of conditions laid down by local law in the Member State where the debtor’s centre of main interest is situated.[73] Even in the unlikely case that Global Bank could satisfactorily make such showing, the “primary secondary” insolvency proceeding will be subordinated to the main insolvency proceeding one such proceedings are commenced.[74] If Global Bank chooses to participate in already opened main or secondary proceedings, it is pertinent that it lodges its claims within the time period provided for by local insolvency laws.

The EC Regulation provides significant relief to cross-border insolvencies involving businesses in EU Member States because it provides binding rules regarding coordination of multiple proceedings and regarding the recognition of foreign judgments. It therefore removes the need to look to local insolvency laws regarding the treatment of cross-border insolvencies. The orders opening main and secondary insolvency proceedings as well as the judgments issued in these proceedings are automatically recognized in all other Member States.[75] Therefore, the effect of the initiation of the insolvency proceedings in other Member States will be the same as prescribed under the laws of the Member State where the insolvency proceeding commenced. The decision of the court conducting the main proceeding can only be challenged on two grounds: 1) if the decision is contrary to the public policy of the recognized state; or 2) if a secondary proceeding has commenced in the recognizing state.[76] A challenge on public policy grounds is very difficult to sustain and usually requires the creditor to show that fundamental principles of constitutional rights, such as the right to a fair trial, have been violated.[77]

In other words, after the decision by the French court to initiate a liquidation proceeding against Encore, Encore no longer has the ability to dispose of or manage its assets located within the EU until the proceeding is closed.[78] Furthermore, once the main insolvency proceeding has commenced, Global Bank has the certainty that creditors located in other Member States will not be able to attach Encore’s assets situated in that jurisdiction. This moratorium or stay order will have immediate effect with respect all assets of Encore, except those assets located in Member States where secondary proceedings have been commenced. Therefore, the French order will cover assets located in France and the Netherlands, but not assets located in England, Austria, Germany, or Italy. Orders and judgments rendered in secondary proceedings will receive automatic recognition with regard to the assets located in the respective jurisdiction where such a proceeding commenced but have no effect on extraterritorial assets, with the exception of assets removed from the jurisdiction after the proceeding commenced.

The liquidators appointed in the main and secondary proceedings are vested with considerable powers in order to collect and safeguard assets. Particularly, the liquidator in the main proceeding is empowered to exercise “all the powers conferred on him by the law of the State of the opening of proceedings in another Member State, as long as no other insolvency proceedings have been opened there nor any preservation measure to the contrary has been taken there.”[79] These powers allow the liquidator in the main insolvency proceeding to remove the debtor’s assets over which it has jurisdiction from the territory of the Member State in which they are situated.[80] Liquidators in the secondary proceeding(s) may, either through the courts or out of courts, claim moveable property which was removed from its jurisdiction after the secondary proceeding was opened.[81] In claiming or removing assets from another jurisdiction, the liquidators have to comply with the laws of the Member State in which they intend to take action, especially regarding the procedure for the realization of assets.[82]

The EC Regulation also provides extensive guidelines regarding the extent to which the liquidators are able to participate in each other’s proceedings. The liquidator of the main proceeding has considerable powers to participate in the secondary proceeding: First, during the course of the secondary insolvency proceeding, he has the obligation to lodge claims that have already been filed in the main proceeding.[83] Second, if a secondary proceeding has been established, the liquidator of the main proceeding is entitled under Article 33(1) to request a stay of the liquidation process in the secondary insolvency proceeding if the continued liquidation would be contrary to the interests of the creditors in the main proceeding.[84] The liquidator must also consent to the closure of a secondary insolvency proceeding.[85] Finally, in the unlikely event of a surplus after the liquidation of assets and satisfaction of the claims allowed in the secondary proceeding, these remaining assets must be transferred immediately to the debtor’s estate in the main insolvency proceeding.[86]

The French liquidator (liquidateur) and the liquidators appointed in secondary insolvency proceedings have the power to avoid preferential transfers or other legal acts detrimental to all creditors which were conducted in violation of their respective national insolvency laws. The powers of the French liquidator are furthermore enhanced by allowing him to collect assets in other Member State in which Encore does not have an establishment, i.e. the Netherlands. The liquidators in the German, Austrian, British, or Italian proceedings are only able to exercise these powers, i.e. the removal of assets out of another jurisdiction, only with respect to local assets. The enhanced powers of the liquidator in the main proceeding reinforce the importance for a creditor to be able to participate in this main proceeding because this proceeding is very likely to cover and distribute the biggest part of the debtor’s assets.

The effectiveness of the liquidator in the main proceeding depends also largely on the cooperation he receives from the liquidators appointed in the secondary proceeding. After the main proceeding is opened, all of the debtor’s assets located in a EU Member State will attach to the estate in the main proceeding. However, as soon as a secondary proceeding commences, the estate available to the main proceeding will be reduced by the assets located in the Member State where the secondary proceedings occur.[87] As already noted above, the liquidator in the main proceeding can participate quite actively in the secondary proceedings, i.e. by lodging claims and even ordering a stay of the proceeding, in order to protect the “main estate”, such participation will have no effect unless the other liquidators comply with his orders. Although the EC Regulation provides that the liquidators in the main proceeding and the secondary proceedings are duty bound to communicate information to and cooperate with each other,[88] the implementation of these provisions cannot be monitored by courts because the competent insolvency court is only empowered to supervise the compliance of the proceedings with domestic insolvency laws.[89]

The EC Regulation contains two other provisions which potentially are of importance to Global Bank’s assessment of its recourse against Encore. Article 6 of the regulation states that “the opening of insolvency proceedings shall not affect the right of creditors to demand the set-off of their claims against the claims of the debtor, where such a set-off is permitted by the law applicable to the insolvent debtor’s claim.”[90] A set-off has been defined as a ”remedy employed by defendant to discharge or reduce plaintiff’s demand by an opposite one arising from transaction which is extrinsic to plaintiff’s cause of action.”[91] Therefore, if Global Bank would have outstanding obligations to Encore arising under any prior contractual relationship, Global Bank could set-off its claim under the standby letter of credit against the obligation previously incurred. The “law applicable to the insolvent debtor’s claim” means that in the main and secondary proceedings the law of each Member State in which such proceedings are opened constitutes the applicable law. Therefore, in the present hypothetical French set-off rules would be applicable in the main proceeding. Article 33(1) of the 1985 Law provides that even though the judgment initiating the insolvency proceeding prohibits any payment by the debtor to the benefit of creditors, the off-set of closely connected debts (creances connexes) remains possible.[92] The notion of “closely connected debts” has been liberally interpreted by French courts to include debts arising from the same contract, debts deriving from global purchase or sale agreements, or debts registered in the same bank account.[93] The availability of a set-off under the applicable national insolvency law is important where the assets of the debtor are insufficient to satisfy all the creditors’ claims. The strategic importance of a set-off reiterates the importance of the determination of where the debtor has its centre of main interest, especially considering the differences of national insolvency laws regarding set-off.[94] If the contract provided for the availability of set-off, then the applicable law governing the set-off is the law applicable to the contractual obligations, in the present hypothetical the place where the letter of credit transaction occurred.[95]

A major exception to the general provisions regarding the applicable law in insolvency proceedings can be found in the context of creditors’ or third parties’ rights in rem with respect to tangible or intangible assets of the debtor. The opening of insolvency proceedings will not affect rights in rem with respect to assets belonging to the debtor which are situated within the territory of another Member State at the time of the opening of the proceeding.[96] The applicable law to rights in rem is the law of the jurisdiction where the assets subject to the right in rem are located.[97] In other words, even if the liquidator of the main or a secondary proceeding has possession of the asset, the liquidator cannot make any decision regarding the asset which might affect the right in rem without the consent of the holder of the security interest in the particular asset.[98] Therefore, under the present hypothetical, the realization of Global Bank’s security interest in Encore’s inventory located in England would be governed by British and not by French law.

However, the liquidator of the main proceeding could potentially reach assets which are the subjects of rights in rem. If the insolvent debtor has an establishment in the Member State where these assets are located, the liquidator of the main proceeding can demand the opening of a secondary insolvency proceeding there; the realization of the assets, including those subject to rights in rem, will be conducted under the lex situs.[99] Insofar as the existing security right will not be affected, the liquidator of the main proceeding may, under the EC Regulation, be entitled to claim the excess value of the asset for the estate.[100] Furthermore, the liquidator may seize an asset serving as a security right in rem as long as no secondary insolvency proceedings have been opened in the Member State where the asset is located and if the value of the asset is higher than the claim for which the asset serves as security.[101]

If Global Bank decides to participate in multiple insolvency proceedings, Article 20 of the EC Regulation, the so-called “hotchpot” rule,[102] becomes applicable. In order to ensure the equal treatment of creditors in the main and secondary proceedings a creditor who has, in the course of an insolvency proceeding, obtained a dividend on its claim may share in distributions made in other proceedings only where the creditors of the same ranking or category have, in those other proceedings, obtained an equivalent dividend.[103] However, participating in all proceedings may nevertheless increase Global Bank’s prospects to find its claim satisfied to a larger extent, for the number of proceedings in which they participate will further the likelihood of obtaining a significant dividend in at least one of them.[104]

As already mentioned earlier in this Note, the EC Regulation does not apply to Encore’s assets located in the United States. Therefore, the treatment of the assets located in the United States has to be analyzed under the applicable provisions in the U.S. Bankruptcy Code as well as rules developed by courts in dealing with cross-border insolvencies. U.S. bankruptcy laws and judicial decisions provide for three possible procedures to resolve cross-border insolvencies. First, foreign representatives[105] can file a request for ancillary[106] proceedings under the U.S. Bankruptcy Code.[107] Second, U.S. bankruptcy courts can defer jurisdiction over the insolvency proceedings to foreign courts based on the principle of comity.[108] Finally, the U.S. and foreign courts can establish protocols of cooperation, which set forth the applicable law governing certain aspects of cross-border insolvencies.[109]

The main reason to provide for ancillary or foreign proceedings in the United States is to prevent the dismantling of the foreign estate by American creditors.[110] After the opening of the ancillary proceeding, there is no automatic stay of creditor collection activities.[111] However, the competent U.S. court may issue an injunction with the same effects as a stay order.[112] Besides injunctive relief, the U.S. court may also order the turnover of property of the foreign estate located in the United States to the foreign representative.[113] The turnover of property depends upon the ability of the court in the foreign proceeding to administer these assets, which will be determined by the laws of the country conducting the main proceeding.[114] The judgments of the ancillary proceeding only affect assets located within the United States.[115]

In the United States, sufficient case law indicates that American courts will extend comity under traditional doctrines of conflict of laws if the foreign jurisdiction’s insolvency laws are similar to those in the U.S. Bankruptcy Code.[116] A recent decision by the Ninth Circuit Court of Appeals suggests that U.S. courts may recognize a foreign judgment if the debtors did not allege that the foreign proceedings failed to meet the requirements under Section 98 of the Restatement of Conflict of Laws.[117] Among these requirements are the opportunity for a full and fair trial, a court competent of jurisdiction, regular proceedings, due citation or voluntary appearance of the defendant, and lack of bias, prejudice, or fraud.[118] In Society of Lloyd’s v. Ashenden,[119] the Seventh Circuit Court of Appeals applied the “compatibility” standard in order to determine whether a judgment by an English court could be enforced. The main reason for the court in Ashenden to recognize the English judgment was the fact that the English system is compatible with the requirements of due process. While the theoretical compatibility of the legal systems in the United States and foreign jurisdictions will make it likely that U.S. courts will recognize and enforce judgments of courts in those foreign jurisdictions, the U.S. courts will take the totality of the circumstances of the foreign system into consideration.[120] A U.S. court will not, for example, enforce a foreign judgment issued by a court that uses identical proceedings on paper if political instability will make it likely that these procedural safeguards of fairness will not be observed.[121]

In the absence of a formal treaty, practitioners and courts have created what are essentially case-specific, private international insolvency treaties. These mechanisms for coordinating multinational proceedings have come to be known as cross-Border insolvency cooperation protocols, or more simply, protocols. The main purpose of protocols is to set forth procedural and substantive elements of law according to which a cross-border insolvency should be governed.[122] Protocols are particularly necessary if two main proceedings are conducted concurrently in two jurisdictions which affect the same parties.[123]Furthermore, cooperation protocols provide for more efficient insolvency proceedings because from the outset, possible sources for dispute must be negotiated. Moreover, the use of cooperation protocols eliminates overlapping proceedings.[124] Protocols can focus either on the cooperation between the foreign administrators, or they can pertain directly to the communications between the foreign courts.[125] While protocols of cooperation in cross-border insolvencies are more likely to be used if the countries involved share the same legal system,[126] protocols have been used between courts of common law and civil jurisdictions.[127] Especially where deferral of jurisdiction over an insolvency is impossible, the drafting of a cooperation protocol has been proven to guarantee fair and equal treatment of foreign creditors.[128]

A cross-border insolvency protocol was for the first time effectively used during the reorganization of the insolvent Maxwell Communication Corporation PLC (MCC). MCC was an English holding company headquartered in London with more than 400 subsidiaries worldwide.[129] Most of MCC’s assets were located in the United States. After suffering financial difficulties, MCC filed petitions with courts in both London and New York for protection from creditors. The almost simultaneous filing of both petitions made the MCC cross-border insolvency more complicated because it was impossible to discern whether England or the United States should have jurisdiction over the main insolvency proceeding. To make matters worse, the differences in the national insolvency laws regarding the administration of the estate were significant because English insolvency law provided for the immediate appointment of an independent administrator who would take control over all assets of MCC, whereas the United States Bankruptcy Code allowed a debtor-in-possession management.[130] However, before an actual conflict could arise, the examiner appointed in the Chapter 11 proceeding and the British administrator agreed to coordinate the two insolvency proceedings through the use of a cross-border insolvency cooperation protocol. The protocol, which was subsequently approved by the U.S. Bankruptcy Court and the London High Court, provided that the British administrators have to make good faith efforts to consult with the U.S.-appointed examiner and to obtain his consent before taking significant steps during the insolvency proceeding.[131] Eventually, the United States Bankruptcy Court approved the reorganization plan and the London High Court a similar scheme of arrangement.[132]

Despite the recent successes of cross-border insolvency protocols, it must be noted that the range of application of these protocols is limited. Except for the handful of occasions in which a protocol has been drafted between a common-law jurisdiction and a civil-law jurisdiction, protocols have primarily involved Canadian, English and other common law jurisdictions.[133] A protocol between a civil-law jurisdiction and a common-law jurisdiction seems only feasible where the cross-border insolvency involves a simple liquidation procedure instead of a reorganization plan or where the national insolvency laws are substantially similar.[134] Furthermore, while protocols typically involve courts in two, at the most three jurisdictions, multinational entities usually have offices and assets in a significant number of countries. Thus, the drafting of a cross-border insolvency protocol for multiple insolvency proceedings involving many jurisdictions might prove to be an insurmountable task.

IV. CHOICE OF LAW AND THE CLAIMS OF BENEFICIARIES OF A STANDY LETTER OF CREDIT AGAINST AN INSOLVENT ISSUING BANK

If the issuer of a letter of credit becomes insolvent, the credit beneficiary faces the problem it seeks to avoid because it has a claim against an insolvent entity and, unless the credit is collateralized or there is a deposit earmarked for the credit transaction, the beneficiary will be only a general creditor of the insolvent issuer.[135] As already mentioned earlier in this Note, the EC Regulation, which constitutes the most comprehensive international insolvency legislation regarding conflicts of laws and norms for cooperation between competent authorities to date, is not applicable to credit institutions. The UNCITRAL Model Law and most of the bilateral and regional agreements regarding cross-border insolvencies similarly exclude banks from their application.

In the absence of an international framework dealing with the winding-up or the reorganization of financial institutions, the coordination of multiple insolvency proceedings is dependent upon the respective national laws of each country exercising jurisdiction over the insolvent banks or one of its branches.[136] In multinational bank defaults, insolvency proceedings could be opened in jurisdictions where the bank maintains local branches or where the bank possesses assets. Conflicts will necessarily arise where multiple insolvency proceedings determine the distribution of the debtor’s assets. The resolution of these conflicts will largely depend upon the interaction of the insolvency or banking laws of the various jurisdictions involved.[137] Since the provisions regarding the treatment of insolvent banks vary significantly among jurisdictions and bank insolvency is still recognized to be in the purview of competence of the respective national authorities, the probability that these authorities cooperate with a foreign court and comply with its orders is very slim.

The hypothetical described in Part III, changed slightly, shall once again serve as an illustration for the discussion in this section: On July 9, 2002, the German steel company Metallwaren AG enters into a contract with the French car manufacturer Encore which provides for the sale of hot-rolled steel. Subsequent to the execution of the contract, Encore requested the local branch of Global Bank in Nice to issue a standby letter of credit with the German company as beneficiary. After Encore provided the Global Bank with a security interest in its inventory sufficient to cover the letter of credit, the bank issues the letter of credit to the German company on July 15, 2002. Metallwaren AG delivered the steel timely on August 21, 2002. Encore defaulted on its payments as required by the contract on September 18, 2002. Metallwaren AG granted Encore seven days in which to cure the default, but to no avail. On October 7, 2002, Encore declared that it is unable to pay its debts (cessation des paiements). On October 10, Metallwaren AG demanded that Global Bank honor the standby letter of credit. However, Metallwaren AG received notice that Global Bank was declared insolvent on September 22, 2002 and that liquidation proceedings have been commenced in the London High Court. Global Bank is incorporated in England, is headquartered in London, and has local branches in France, Germany, Italy and the United States. Furthermore, Global Bank has a bond deposit at the Austrian bank Handelsbank. The standby letter of credit was issued in Nice and the contract between Metallwaren AG and Encore was signed in Modena, Italy.

Cross-border insolvencies of multinational financial institutions are more complex than the default of corporations and bring to light the diversity of approaches taken by different jurisdictions. Before a large- or medium sized bank will be determined to be insolvent, governments will in most cases come to the rescue of these financially distressed bank in order to avoid negative consequences for the capital markets business.[138] Such regulatory “pre-insolvency” intervention is designed to address financial weaknesses and violations of prudential requirements at an early stage. Most countries in their banking laws provide for a bank supervisor who is empowered to take remedial action and direct a bank’s future business undertakings.[139] However, although their national banking laws contain special requirements limiting or even removing the ability of creditors to file insolvency petitions,[140] most of the Member States of the EU do not have comprehensive provisions on bank insolvency and consider it sufficient to apply general bankruptcy laws.[141] Only Italy has special administrative insolvency proceedings applicable to special entities, including banks.[142] Other jurisdictions, such as the United States, explicitly exclude financial institutions from the application of the general bankruptcy laws and have an entirely separate insolvency regime.

Of crucial importance to both the insolvent banks and its creditors is the determination of whether a jurisdiction takes a single-entity or separate-entity approach regarding a branch of the insolvent bank located in its jurisdiction. Countries with the separate-entity approach, such as the United States[143] and France,[144] seize the assets of a local branch of an insolvent bank and distribute them among creditors with claims against that branch.[145] Under this doctrine each branch of a foreign bank operating in the jurisdiction is treated as a separately incorporated legal entity for some purposes. In the event of a liquidation of a foreign bank with a local branch, the branch would be liquidated separately from the entity as a whole.[146] Creditors of the local branch would be reimbursed from the assets of that branch and other assets of the bank in the jurisdiction.[147] The local liquidator is empowered to distribute not only the assets of the branch worldwide but all the assets of the bank in the jurisdiction. Creditors of other branches are prohibited from participating in the local liquidation proceedings.[148] The assets would be administered first for the benefit of the creditors of the local branch and, in the unlikely case that a surplus exists upon the satisfaction of all claims, the liquidator may transfer any excess assets to another jurisdiction for distribution in an insolvency proceeding there.[149] The separate-entity approach has therefore potentially dire consequences for foreign creditors who do not have a direct claim against the local branch, because local creditors in the separate-entity jurisdiction may receive a higher share of their claim during the liquidation proceeding as compared to foreign creditors located in jurisdictions with a single-entity approach.[150]

Conversely, under the single-entity approach, which is followed by Great Britain and most other Member States of the EU, banks are liquidated as one legal entity and branches of foreign banks are being considered offices of the larger corporate entity.[151] All creditors of the bank, foreign or domestic, are entitled to prove in the liquidation. Claims of creditors of a particular branch would generally not obtain priority over the claims of creditors of other branches in the liquidation. Theoretically, liquidators in single-entity jurisdictions are concerned with the collection and administration of worldwide assets of the bank in liquidation. However, in practice, they are likely to obtain control only of assets located within their jurisdiction and foreign assets that are located in jurisdiction where they can obtain recognition.[152] For example, jurisdictions following the separate-entity approach are unlikely to cooperate with the foreign administrator of such a universal proceeding and turn over assets of the local branch, except in the case where a bilateral treaty between the two jurisdictions or national insolvency laws would mandate such cooperation.

The adoption by the competent national authorities of the exclusive right to administer the insolvency proceedings of a bank located in its jurisdiction leads inevitably to the creation of more than one set of proceedings, especially where assets, establishments and obligations of the insolvent bank are identified with more than one proceeding.[153] Although very few territorial proceedings today explicitly prohibit participation by foreign creditors, participation by foreign creditors in foreign proceedings depends on the availability of knowledge and information, their ability to be diligent and to overcome procedural obstacles.[154] The costs of collecting debts across international boundaries and the uncertainty of litigation are also factors making effective access to the debtor’s insolvency proceedings more difficult for the creditors.[155] Few creditors will have the resources to take advantage of multiple proceedings and prove outstanding debts in different countries, and then usually only because those creditors are themselves multinational entities.[156]

In the present hypothetical, Global Bank and its local branches could be subjected to territorial insolvency proceedings in England, Italy, Germany, the United States, and Austria. The different national approaches of these jurisdictions in dealing with insolvent banks has direct implications on where Metallwaren AG will be able to participate in or initiate an insolvency proceeding against Global Bank. Since Metallwaren AG’s claims arose from its transaction with Global Bank’s local branch in France, it cannot participate in U.S. liquidation proceedings because the United States uses the separate entity. This inability to participate in the U.S. proceeding could create a particularly adverse situation for Metallwaren AG if most of Global Bank’s assets are located there. Metallwaren AG could submit its claim to the U.S. court only if the letter of transaction would have occurred in the United States and it therefore would have become a direct creditor of the U.S. branch of Global Bank.

Theoretically, the best choice for Metallwaren AG to participate in the liquidation proceeding is in England because the court there will wind up Global Bank by using the single-entity approach. Accordingly, the English court will administer all of Global Bank’s assets, wherever they are located and its orders and judgment have worldwide effect. However, the single-entity approach presupposes that other jurisdictions will automatically recognize the English judgment. Such an automatic recognition is unlikely to occur in jurisdictions which apply the separate-entity approach to branches of foreign banks. Similarly to the United States, France applies the separate-entity approach to local branches of insolvent foreign banks. The standby letter of credit was issued by Global Bank’s branch in Nice. Therefore, Metallwaren AG, as beneficiary of the letter of credit, became a direct creditor of the French branch and is be able to lodge its claim with the competent French court. Metallwaren AG could also file a petition to commence an insolvency proceeding in Italy.

Austrian private international law permits a foreign creditor to pursue its claim in an Austrian insolvency proceeding regardless of whether the jurisdiction in which the foreign creditor is located has entered into a bilateral or multilateral treaty with Austria.[157] It is nevertheless important to mention that Austria has concluded a bilateral treaty regarding cross-border insolvency matters with Germany.[158] Additionally, Metallwaren AG may pursue as foreign creditor its claim in an Austrian insolvency proceeding regardless of whether a bilateral or multilateral treaty exists between Austria and Germany exists. Finally, the most convenient forum-selection for an insolvency proceeding would be Germany, because Metallwaren AG has its place of incorporation there and would not have to litigate in a foreign jurisdiction. While Metallwaren AG has the standing to lodge claims in Italy, England, France, and Austria, its pursuit of litigation in the se jurisdictions is made more complicated by a lack of effective notice of proceedings and by difficulties due to language and legal barriers. Such procedural difficulties may lead to the complete loss of a claim against the insolvent bank.[159]

The most important stage for every creditor is the actual satisfaction of its claims against the debtor. However, in most instances the assets available in a single jurisdiction will not suffice to cover all claims completely and usually unsecured creditors find themselves undercompensated at the closure of an insolvency proceeding. Therefore, creditors will seek to enforce the judgment rendered by a domestic court in another jurisdiction without actually having to participate in a full insolvency proceeding there under local law. As can be expected in the absence of an international insolvency framework, the willingness of foreign jurisdictions to turn over assets located in its jurisdiction or to enforce a foreign judgment is highly uncertain. Unless the domestic insolvency laws contain specific provisions, trustees or similar administrators in insolvency proceedings are often unwilling to transfer domestic assets elsewhere in order to assist other operations involving the insolvent bank. Quite often, there may be no specific statutory authority for cooperation and any transactions which would could assist foreign insolvency proceedings elsewhere may run contrary to domestic public policy or law.

Since only multinational creditors can afford to incur the expenses of litigating in multiple fora, most creditors will seek to pursue their claim in a domestic insolvency proceeding and then petition, either by their own initiative or through a foreign representative, the foreign court to enforce the judgment rendered in the domestic proceeding. Until a comprehensive international insolvency agreement is adopted which provides guidelines regarding the recognition of foreign judgments in cross-border insolvencies, the private international rules of each jurisdiction will be outcome-determinative. It is pertinent for all creditors to be aware of these rules before they attempt to enforce a domestic judgment in another jurisdiction. This Note will in the following discuss the different treatment of cross-border insolvencies under the private international law provisions of France, Austria, Italy, Germany, and the United Kingdom.

France does not have a separate statutory framework that addresses cross-border insolvencies. Contrary to the United States, French case law suggests that French courts will predominantly apply the territoriality principle in cross-border insolvencies.[160] However, a foreign administrator or creditor seeking to enforce a foreign judgment may petition the Tribunal de Grande Instance to issue an order recognizing the foreign judgment (exequatur) and give this decision the same authority as a French judgment.[161] Article 2123 of the French Civil Code sets forth the factors that French courts consider in determining whether to permit a request for recognition of a foreign judgment: 1) French courts cannot have exclusive jurisdiction because of conflict of jurisdiction rules; 2) French courts must find the jurisdiction asserted by the applicant acceptable; 3) the choice of foreign court must no be fraudulent; 4) the foreign court must be competent to make the insolvency order; 5) the foreign judgment must not be fraudulent; and 6) the judgment must no contradict French public policy.[162]

The party seeking enforcement must have a direct interest in the enforcement of the foreign judgment.[163] Once the foreign administrator or creditor has obtained an order of enforcement, the foreign judgment may be executed in France.[164] Although the foreign bankruptcy proceeding is enforced by a French decision, it is subject to the foreign law.[165] If a foreign creditor fails to file a request for an exequatur, the foreign judgment will have no effect on the debtor’s assets located in France because France is not a party to multinational treaties.[166] Rather, France only has entered into bilateral international insolvency treaties with Belgium, Italy, Monaco, and Austria.[167] These bilateral treaties provide that the courts of each country where the debtor has a registered business will have jurisdiction over the insolvency proceedings. Moreover, the foreign courts’ judgments will be enforced in the other country party to the treaty.[168] Although the foreign creditor still needs to request an exequatur in France, the process is facilitated in the light of a bilateral treaty.[169]

The necessity of acquiring an exequatur in France raises the important question of whether only a final judgment can be enforced or whether other preliminary measures may be taken by the foreign court and be enforced in France.[170] The Cour de Cassation in Kleber held that foreign insolvency proceedings take effect not only from the moment an exequatur order has been issued in France but also from the date of the foreign bankruptcy order.[171] The holding by the French Supreme Court is very important in order to determine whether certain transfers constituted fraudulent or preferential transfers.

As a general rule, Austrian courts do not recognize any decisions issued by any foreign insolvency authorities, except where a multilateral convention or a bilateral treaty with such country exists.[172] Austria has concluded bilateral treaties in insolvency matters only with Belgium, Germany, France, Italy, and the United Kingdom.[173] Even if such a bilateral has been concluded between Austria and the foreign jurisdiction, several criteria must be met before a foreign judgment will be enforced by an Austrian court. The Austrian Enforcement requires that 1) the foreign authority must have had jurisdiction over the debtor to initiate bankruptcy proceedings; 2) there must have been proper service of the order initiating the proceeding; 3) the foreign order must be enforceable in the country of origin; and 4) no recognition and enforcement can be granted if the debtor has not been given due process of law of if the order violated public policy.[174]

Decree No. 218 of 31 May 1995 profoundly changed the area of the Italian private law system.[175] Article 64 of Law No. 218 provides for the automatic recognition of a foreign judgment in Italy if certain criteria are met.[176] First, the judgment must have been issued by a judge having jurisdiction on the case according to principles of Italian law; second, the writ initiating the proceedings was served upon the debtor in accordance with the lex concursus of the right of defense; third, the judgment is res judicata according to lex concursus; fourth, the judgment does not rule against another judgment issued by an Italian judge; fifth, no process, started before the foreign process and between the same parties, is pending before an Italian judge for the same matter; and sixth, the effects of the foreign judgment are not contrary to the Italian public order.[177] The last requirement that a foreign judgment must not violate Italian public policy is very important because it represents a significant restriction on the enforcement of a foreign insolvency judgment. An Italian court will not recognize and enforce a foreign judgment if the judicial authorities of the foreign jurisdiction violated its duty to sufficiently notify the debtor about the existence of insolvency proceeding and thus deprived the debtor of its right to be heard and defend itself.[178]

There are limits to how much effect foreign judgments will be given by German courts.[179] The most important factor that German courts consider is whether the foreign judgment substantially comports with German insolvency proceedings. The criteria used to determine compatibility include the purpose of the proceedings (equal satisfaction of creditors in a common manner), the procedures available to reach this aim (liquidation or reorganization), and the fact that some form of insolvency is required under the foreign insolvency law in order for the proceedings to be commenced.[180] German courts take particular notice of whether creditors will be satisfied equally and in an order similarly proscribed by German law.[181] If foreign court has granted the opening of an insolvency proceeding, such an order will generally be recognized by German court if the foreign court has jurisdiction over such a proceeding.[182] If an order issued by a foreign court granting a petition is recognized, it will be enforceable in the same way as a judgment rendered by a German court.[183] The specific legal effects of such an order, i.e. whether the trustee can avoid a transaction or preferential transfer, will be determined in accordance with the law of the foreign jurisdiction.[184]

When examining the incompatibility, German courts do not have to focus on the provisions of foreign insolvency in general, but must consider the potential results in the each particular case. A denial of recognition regarding a foreign judgment may either extend to the entire judgment and will therefore have no legal effect in Germany or only to some specific results of the judgment.[185] Article 102 of the German Introductory Law to the Insolvency Code provides that despite the existence and recognition of a foreign insolvency proceeding, German creditors can initiate a separate proceeding in Germany. The judgment rendered in such a separate insolvency would only extend to the debtor’s assets located in Germany.[186] Although the Introductory Law does not specifically address the issue, the separate German proceeding would supersede a foreign proceeding regarding the debtor’s assets in Germany.[187] However, a separate German insolvency proceeding does not preclude the German administrator and the German courts from cooperating with foreign authorities.[188] Furthermore, even if a foreign proceeding has been initiated, a foreign representative cannot commence an insolvency proceeding in Germany. Rather, only a foreign or German creditor can commence such a proceeding.[189]

Similar to France, British statutory law does not specifically address the issue of cross-border insolvency. British courts generally adhere to the principle of cooperation and provide foreign creditors with access to the debtor’s assets located in England and Wales. Furthermore, British courts recognize judgments by foreign courts.[190] For example, a British court will generally enforce orders by foreign bankruptcy courts against an insolvent entity if the foreign court sits in the entity’s country of registration.[191] However, the debtor’s assets located in England or Wales will not automatically be turned over to the foreign representative.[192] Instead, the foreign administrator must file a petition for an order empowering him to seize and realize the debtor’s assets located in England or Wales. Such a petition will only be granted if the court determines that such an order would not adversely affect local creditors.[193]

The existence of a foreign insolvency proceeding does not bar a British court or creditor from initiating a separate proceeding. British courts have discretion to decide whether it is in the best interest of justice to allow an ancillary proceeding.[194] Although Section 216 of the Insolvency Act provides for assistance only to certain jurisdictions,[195] British courts can and have extended the statutory provision beyond the mentioned countries, especially where England and another jurisdiction can claim primary jurisdiction over an insolvent entity.[196]

Since the adoption of the EC Regulation, the European Council has issued two directives dealing with the reorganization and winding up of insurance undertakings[197] and credit institutions.[198] Contrary to a regulation, which is binding per se, a directive is only binding to the result to be achieved and the method and form to achieve this goal is in the discretion of the governments of the Member States.[199] Compliance with a directive may require a new statute, an administrative act or even a constitutional amendment.[200] The European Council Directive on the Reorganization and Winding Up of Credit Institutions (EC Directive) mandates Member States to bring their national laws in compliance with the directive’s provisions by May 5, 2004.[201] The EC Directive is the first international insolvency framework specifically designed to deal with insolvent multinational banks and will as such provide much needed certainty regarding the laws governing the reorganization or liquidation proceedings.

The EC Directive is applicable to credit institutions and their branches in EU Member States.[202] It must be noted that the scope of the directive does not extend to include the central banks of the Member States, post office giro institutions, and certain types of institutions such as credit unions and friendly societies.[203] The directive potentially has an effect beyond the EU Member States and could apply to branches of a non-EU bank if such a bank has branches in at least two Member States.[204] The terminology “non-EU” bank refers to banks which have their head office outside the territory of the EU Member States. Despite this extended scope, it remains to be seen to what degree the level of coordination envisioned by the provisions of the directive can be achieved. Such cooperation between the competent authorities of the third party country and of the EU Member State will largely depend on the similarity of their national laws and procedures dealing with insolvent banks.

The EC Directive vests exclusive jurisdiction in the home member state’s administrative or judicial authorities to decide the commencement of insolvency proceedings against the insolvent bank, including its branches in other Member States, under the laws of the home Member State.[205] “Home Member State” means the Member State in which a credit institution has been authorized.[206] By leaving the determination of the proper course of the insolvency proceedings with the competent national authorities instead of prescribing a certain procedure, the directive takes into account the circumstance that in some countries it is up to the judiciary to decide the opening of insolvency proceedings while in others such a decision is vested in the banking supervision authorities.[207] Such an approach was advisable especially considering the fact, as was already outlined earlier in this Note, that in some systems banks are subject to general insolvency law while others provide for special proceedings.

The drafters of the EC Directive chose a centralized, single insolvency proceeding approach because this would comply with general notion that the home Member State is better suited to deal with the insolvent bank and that such an approach would help ensure equal treatment of all creditors.[208] The Directive provides the competent judicial or administrative authorities of the home Member State with the sole power to implement one or more reorganization measures or the opening of winding-up proceedings. While the possibility of opening insolvency proceeding in host Member States suggests that secondary territorial insolvency proceedings are permitted the EC Directive, such a perception is wrong because the directive merely provides for reorganization and liquidation proceedings of different intensity subject to the laws of the home Member State.[209] The “host Member State” is a Member State in which a credit institution has a branch[210] or in which it provides services.[211]

Once insolvency proceedings have commenced in the home Member State, the authorization of the credit institution will be withdrawn.[212] The home Member State law provides for the conditions of adoption of the measure or of opening of the proceeding. The insolvency reorganization measures or liquidation proceedings are effective throughout the EU once they become effective in the Member State where they have been taken without the need of any formalities or exequatur procedure.[213] Furthermore, while most aspects of the proceeding will be governed by the home Member State’s laws, i.e. set-off, voidable transaction, and treatment of claims,[214] certain contracts and rights, such as employment rights and reservation of title, are dealt with in accordance with the law that governs them, namely lex domicilii, lex situs, or lex contractus. [215] The exceptions in favor of lex domicilii or the lex contractus are limited to the effects of the measures on certain contracts and rights and does not cover other questions such as the lodging, verification, admission and ranking of claims concerning those contracts and rights and the rules governing the distribution of proceeds which are governed by the law of the home Member State.[216]

Once the EC Directive is implemented in all EU Member States by 2004, it will completely change the landscape of cross-border insolvencies of multinational banks in Europe. Returning to the hypothetical involving the Global Bank insolvency, Metallwaren AG faced the dilemma of being either excluded from participation in liquidation proceeding in separate-entity jurisdictions or having to litigated in multiple for a because most jurisdictions will apply the territoriality principle. Under the EC Directive, Metallwaren AG is likely to have to litigate in only a single insolvency proceeding, namely that in the home Member State. More importantly, since the EC Directive mandates that host Member States have to automatically recognize the judgments of the courts of home Member State, Metallwaren AG is certain to receive the same treatment as local creditors located in the host Member State. For example, although France usually takes the separate-entity approach regarding the treatment of local branches of foreign banks, its authorities would be obligated to cooperate with the home Member State proceeding and enforce any judgment rendered by the foreign court.

Despite its promising potential to help deal more effectively with the default of multinational banks, the EC Directive certainly has its limits and restrictions. Although theoretically the EC Directive is not necessarily confined in its scope to the territory of the EU, its enforceability beyond the EU, especially in separate-entity jurisdictions such as the United States, remains highly questionable. Furthermore, the EC Directive is not applicable to branches of a EU bank located in a non-Member State. In the Global Bank scenario, the EC Directive does not apply to the branch located in the United States. The administrators in the home Member State proceeding would have to rely on the measures of cooperation provided for in the United States Bankruptcy Code, most importantly the possibility of ancillary relief under Section 304. A recent example of such cooperation is the insolvency involving the Russian bank Rossiyskiy Kredit Bank (RKB), where the United States Bankruptcy Court for the Southern District of New York granted a permanent injunction pursuant to Section 304 prohibiting the enforcement of judgments against or the possible attachments of RKB’s assets in the United States by local creditors.[217] Judge Beatty of the Bankruptcy Court based her decision granting the permanent injunction on the premise that, although the provisions of the Russian Credit Reconstruction Act are not identical to United States Bankruptcy law, these differences were not fatal to the success of an ancillary case considering the entirety of the circumstances and the law.[218] Judge Beatty’s decision might serve as an important precedent for future cooperation efforts between the United States and other jurisdictions in cross-border insolvencies of banks. However, it must be noted that the Russian bank merely held assets in the United States and did not maintain a local branch there. Therefore, Judge Beatty’s decision does not preclude the possibility that the United States will continue to strictly apply the separate-entity approach regarding local branches of insolvent foreign banks.

The EC Directive includes a comprehensive set of provisions ensuring the proper flow of information and communication between the competent authorities of the home Member States and the authorities and creditors in the host Member States. The EC Directive imposes a duty upon the competent authorities of the home Member State to inform the host Member State authorities about the commencement of reorganization or winding-up proceedings.[219] Moreover, Article 5 imposes a duty on the home Member State authorities to inform the competent authorities in the host Member State if the first deems it necessary to implement within their territory one or more reorganization measures. The European Council wanted to assure that the authorities of the home Member State provide timely information about the potential difficulties of the local branches within its jurisdiction and to allow for an assessment of the opportunity to adopt reorganization measures for the bank as a whole or just the branch established in another Member State.[220] It is important to mention that the EC Directive does not affect the national laws which empower the authorities of the home Member State to intervene on the branches, even if established abroad, of a bank that they authorized. However, if the Member State authorities do not deem it necessary to assume any initiative, neither on the bank nor on the branch, the host Member State authorities should be free to adopt their extraordinary measures for the branch established on their territory.

As discussed earlier, one of the procedural obstacles that foreign creditors frequently incur when attempting to participate in an insolvency proceeding in another jurisdiction is the lack of timely notice and adequate information about the proceeding.

The Directive provides for norms on publication and information duties aimed to help clients and third parties in general to exercise their own rights and, above all, to put the branch clients on equal footing compared to the home ones. Articles 6 and 13 provide for publication duties respectively for reorganization measures and winding-up proceedings. The publication must be done by publishing an extract from the decision in the Official Journal of the EU and in two national newspapers in each host Member State. Such a duty of publication is particularly crucial for foreign creditors to be able to timely appeal the foreign court’s decision to commence insolvency proceedings or to submit claims during the proceeding in the home Member State. The instrumental function of publication for the right of appeal is underlined by Article 6(1) which states that publication itself must be made in particular to facilitate the exercise of the right of appeal in good time. The provisions regarding the flow of information between the authorities in home Member States and host Member States as well as the duty to provide adequate notice of the existence of the proceeding reiterate a recurring notion in the throughout the entire EC Directive, namely that the judicial authority of the home Member State is the only one competent to know the appeals against the insolvency measure.[221]

V. CONCLUSION

The lack of an international insolvency framework in order to effectively deal with cross-border insolvencies of multinational corporations or credit institutions has a disastrous impact on the standby letter of credit regime. In the light of the possibility of having to pursue expansive litigation in a foreign jurisdiction with an unpredictable outcome due to its status of unsecured creditor, credit institutions will either be unwilling to issue standby letter of credits to companies or will increase the costs of the financial transaction at the expense of the applicant. Similarly, beneficiaries of letters of credit face a particular plight in pursuing their claim against an insolvent multinational bank because the competent authorities of each country with jurisdiction will have an interest to protect the domestic economy and domestic creditors. Because most countries adhere to a form of the territoriality principle in dealing with cross-border insolvencies and are less likely to cooperate in such proceedings concerning credit institutions, the beneficiaries might be forced to pursue their claims in several foreign jurisdictions and are likely to incur significant expenses and procedural obstacles.

Although recent progress has been made by the international community regarding the cross-border insolvencies of corporate entities with the UNCITRAL Model Law and the EC Regulation, such agreements either lack a legally binding character or are confined in their application to a narrow geographical area. The situation in the area of cross-border insolvencies of banks is even bleaker because every international insolvency agreement has so far excluded credit institutions from its application. The EC Directive is a first step in the right direction even though it is limited to cross-border insolvencies occurring within the EU Member States. These agreements, especially the EC Regulation and the EC Directive, are certain to provide valuable guidelines for the drafting of a binding international insolvency convention that, at the very least, will include a comprehensive set of conflict-of-laws rules and will thus remove the uncertainty underlying international commercial transactions.

Until the completion of such a convention, the parties to a letter of credit transaction can take other precautions reducing the risk of a complete loss of their claims in a cross-border insolvency situation. For example, issuing banks are well advised to receive a security interest in tangible or intangible property of the debtor or have another bank confirm the standby letter of credit. As the holder of such a right in rem, the issuing bank acquires the status of a secured creditor and stands a better chance of being reimbursed for its claim. Further, the law governing such rights in rem is easier assessable because they are usually governed by the laws of the jurisdiction in which assets subject to such rights are located. Beneficiaries of letters of credit should negotiate with the other party to the underlying contract the possibility that the applicant use a bank that the beneficiary has chosen, preferably an internationally recognized bank. If the applicant insists on choosing a certain foreign bank, the beneficiary can have a bank from its country confirm the letter of credit. If the foreign bank does not have a branch in the beneficiary’s country of residence, then such a confirmation would ensure that the beneficiary does not have to litigate in another jurisdiction.

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[1] Judge Tina L. Brozman was sitting in the United States Bankruptcy Court for the Southern District of New York when dealing with the Maxwell Communications Corporation's international insolvency.

[2] Black’s Law Dictionary 904 (6th ed. 1990).

[3] Id.

[4] The examples of a letter of credit transaction discussed in this Note do not include the instance in which a second bank is confirming the standby letter of credit.

[5] Herstatt was a large German bank headquartered in Cologne, Germany with branches worldwide. Following the oil crisis and its effects on the international balance of payments, Herstatt suffered severe losses and eventually became insolvent. In accordance with German law, the German court declared Herstatt insolvent and appointed a liquidator to stop all payments and close the bank. Herstatt’s clearing bank in New York froze Herstatt’s account and only accepted payments that benefited Herstatt but did not allow any outgoing counterpayments. Within days of the order declaring Herstatt insolvent, creditors in New York tried to attach Herstatt’s frozen accounts. State and federal courts in New York allowed the attachment, and the accounts of Herstatt in New York were emptied by the creditors in New York. American creditors were concerned with the status that a German court would grant them, because it became clear that a German court would be the proper forum to conduct the insolvency proceedings.

[6] See Basel Committee on Banking Supervision, The Insolvency Liquidation of a Multinational Bank, December 1992, [hereinafter Basel Committee] available at http://www.bis.org/publ/bcbsc333.pdf (The BCCI companies included BCCI Holdings (Luxembourg) S.A., BCCI S.A. (one of the principal operating subsidiaries of BCCI Holdings with 47 branches and two subsidiaries located in 15 countries), BCCI Overseas Ltd. (the other principal operating subsidiary of BCCI Holding with 63 branches located in 28 countries, and the other subsidiaries and affiliates of BCCI Holdings which operated 255 banking offices in about 30 countries. At the time BCCI was closed, it had approximately 380 offices in nearly 70 countries. On 3rd January 1992, the Luxembourg court ordered the winding-up and liquidation of BCCI S.A. The ruling fixed the powers of the liquidators and the mode of liquidation. On 14th January 1992, the UK court issued a winding-up order in respect of BCCI S.A. On the same date, the Cayman court issued winding-up orders in respect of BCCI Overseas and CFC. On 11th June 1992, the Luxembourg court ordered the winding-up and liquidation of BCCI Holdings. On 21st November 1991, a New York State court ordered the commencement of a claims process in the liquidation of BCCI S.A.'s New York agency, commencing on 9th December 1991 and ending 27th March 1992. BCCI Overseas Ltd. was registered in the Cayman Islands and had a French branch in Paris against which the Paris Tribunal of Commerce commenced a bankruptcy proceeding. The Cayman Islands liquidators of BCCI Overseas challenged the judgment of the Tribunal, inter alia, on grounds that the French court lacked jurisdiction and that the order of the Cayman Islands bankruptcy court should universally apply. The Cour de Cassation reasoned that the judgment of the Cayman Islands bankruptcy court could not be directly recognized in France because no request for an exequatur had been made. Furthermore, the French Supreme Court held that French courts have jurisdiction to open secondary insolvency proceedings against branches of foreign companies located in France regardless of their size.

[7] United Nations Commission on International Trade Law, Model Law on Cross-Border Insolvency, May 30, 1997, 36 I.L.M. 1386 (1997) [hereinafter UNCITRAL Model Law].

[8] See Prof. Bob Wessels, European Union Regulation on Insolvency Proceedings, 20-Nov Am. Bankr. Inst. J. 24, 31 (2001) (“The model law, in (slightly) amended form, has been enacted by Mexico and South Africa. As of April 2001, Japan has amended its insolvency legislation with a series of provisions based on the model law. In the United States, a new chapter 15 to the Bankruptcy Code (containing 32 sections almost mirroring UNCITRAL's Model Law) is pending, and in §14 of the Insolvency Act 2000 in the United Kingdom, it is provided that the secretary of state may by regulation make any provision that he considers necessary to the model law on cross-border insolvency”).

[9] See Convention on Private International Law, 86 L.N.T.S. 111, at 246-362, Feb. 20 (1928) (The following parties have signed and ratified the Convention: Bolivia, Brazil, Costa Rica, Cuba, Chile, Ecuador, El Salvador, Guatemala, Haiti, Honduras, Nicaragua, Panama, Peru, Dominican Republic, and Venezuela); See also The Nordic Bankruptcy Convention of 7 November 1933, No. 3574, 155 L.N.T.S. at 133-139 (1935) (The five parties to the Convention include Iceland, Norway, Sweden, Finland, and Denmark).

[10] European Council Regulation No. 1346/2000 on Insolvency Proceedings, 2000 O.J. (L 160) 1-3 [hereinafter EC Regulation] (The regulation is applicable to all European Union Member States, except Denmark).

[11] Id. art. 1(2); see also UNCITRAL Model Law, supra note 7, art. 1(2).

[12] Eva Hüpkes, Insolvency-Why a Special Regime for Banks?, May 2002, available at http://www.imf.org/external/np/leg/sem/2002/cdmfl/eng/hupkes.pdf., at 28.

[13] Id.

[14] See generally Philip Molyneux, Banking Crises and the Macro-economic Context, in Bank Failures and Bank Insolvency Law in Economies in Transition 14-17 (Rosa M. Lastra & Henry N. Schiffman, eds. 1999) (for a discussion of the Macro-economic consequences of bank failures).

[15] Ian F. Fletcher & Hamish Anderson, The Insolvency Issues, in Cross-Border Security and Insolvency 261 (Michael Bridge & Robert Stevens, eds. 2001).

[16] Id. at 258-59

[17] Id. at 259.

[18] Id.

[19] Hannah L. Buxbaum, Rethinking International Insolvency: The Neglected Role of Choice-of-Law Rules and Theory, 36 Stan. J. Int’ l. L. 23, 30 (2000).

[20] Ian F. Fletcher, Insolvency In Private International Law 11 (P.B. Carter ed., 1999).

[21] Carl Felsenfeld, Felsenfeld On International Insolvency 1-25 (2000).

[22] Jay L. Westbrook, Multinational Enterprises in General Default: Chapter 15, the ALI Principles, and the EU Insolvency Regulation, 76 Am. Bankr. L.J. 1, 5 (2002); See also Samuel L. Bufford, International Insolvency 3-4 (Federal Judicial Center 2001) (Territoriality takes the pessimistic view that local claimants ultimately will not receive their fair share of the assets in a foreign insolvency).

[23] Felsenfeld, supra note 21, at 1-27; See also David H. Culmer, The Cross-Border Insolvency Concordat and Customary International Law: Is it Ripe Yet?, 14 Conn. J. Int’ l. 563, 575 (1999).

[24] Culmer, supra note 23, at 575.

[25] Report of the National Bankruptcy Review Commission, U.S. Government Printing Office, October 20, 1997, at 353, cited in Felsenfeld, supra note 21, at 1-27.

[26] Paul Omar, International Insolvency Co-operation: The UNCITRAL Model Law, available at http://www.mlj.com.my/P.Omar1.htm (At a more substantive level, differing priority rules in each country will affect the overall distribution of dividends and surplus assets to creditors).

[27] Felsenfeld, supra note 21, at 1-27; In addition to the disadvantage of being unfamiliar with the foreign legal system and rules, the foreign creditor will incur significant expenses by having to litigate in another jurisdiction.

[28] Id.

[29] Buxbaum, supra note 19, at 26

[30] Lynn M. LoPucki, Cooperation in International Bankruptcy: A Post-Universalist Approach, 84 Cornell L. Rev. 696, 704 (1999).

[31] Id. at 705.

[32] Philippe Woodland, The Proposed European Community Insolvency Convention, in Current Issues in Cross-Border Insolvency and Reorganisations 6 (E. Bruce Leonard & Christopher W. Besant, eds. 1994).

[33] Claudia Tobler, Managing Failure in the New Global Economy: The UNCITRAL Model Law on Cross-Border Insolvency, 22 B.C. Int’l. & Comp. L. Rev. 383, 400 (1999) (In each of the ancillary proceedings, the foreign state’s court gives effect to the declaration of bankruptcy in the main proceeding, recognizes the claims of the trustee, orders the turnover of all local assets to the main proceeding, and applies the substantive laws of the country in which the main proceeding is being administered).

[34] Lore Unt, International Relations and International Insolvency Cooperation: Liberalism, Institutionalism, and Transnational Legal Dialogue, 28 Law & Pol’y Int’l. Bus. 1037, 1044 (1997).

[35] Andre J. Berends, The UNCITRAL Model Law on Cross-Border Insolvency: A Comprehensive Overview, 6 Tul. J. Int’l. & Comp. L. 309, 313 (1998).

[36] Tobler, supra note 33, at 400.

[37] Buxbaum, supra note 19, at 55-56.

[38] Felsenfeld, supra note 21, at 1-26.

[39] LoPucki, supra note 30, at 725.

[40] Kent Anderson, The Cross-Border Insolvency Paradigm: A Defense of the Modified Universal Approach Considering the Japanese Experience, 21 U. Pa. J. Int’l. Econ. L. 679, 690 (2000).

[41] Felsenfeld, supra note 21, at 1-33.

[42] LoPucki, supra note 30, at 728.

[43] Freshfields Bruckhaus Deringer, The EU Regulation on Insolvency Proceedings, available at http://www.freshfields.com/practice/finance/publications/pdfc/23215.pdf [hereinafter Freshfields-EC Regulation].

[44] Id.

[45] EC Regulation, supra note 10, art. 39.

[46] See Bufford, supra note 22, at 77; See also EC Regulation, supra note 10, recital 11 (“This Regulation acknowledges the fact that as a result of widely differing substantive laws it is not practical to introduce insolvency proceedings with universal scope in the entire Community. The application without exception of the law of the State of opening of proceedings would, against this background, frequently lead to difficulties…This Regulation should take account of this in two different ways. On the one hand, provision should be made for special rules on applicable law in the case of particularly significant rights and legal relationships (e.g. rights in rem and contracts of employment). On the other hand, national proceedings covering only assets situated in the State of opening should also be allowed alongside main insolvency proceedings with universal scope”).

[47] EC Regulation, supra note 10, art. 3(1), (2).

[48] Id. art. 3(1).

[49] Fletcher, supra note 20, at 11.

[50] EC Regulation, supra note 10, art. 4(2)(a)-(m) (This section includes thirteen matters which are determined by the law of the Member State with jurisdiction over the main proceeding: against which debtors insolvency proceedings may be brought; which assets form part of the estate; powers of the debtor and the liquidator; conditions for set-offs; effects of insolvency proceedings on current contracts; effect of insolvency proceedings brought by individual creditors; rules regarding the admission and verification of claims; rules regarding the distribution of assets; conditions for closure of proceedings; creditors’ rights after closure; and the rules relating to the avoidability of transfers detrimental to all creditors); See also Collier International Business Insolvency Guide § 43.04(1)(Matthew Bender 2001).

[51] Id. art. 3(1) (“In the case of a company or legal person, the place of the registered office shall be presumed to be to be the centre of its main interest in the absence of proof to the contrary”).

[52] Freshfields-EU Regulation, supra note 43, at 5.

[53] Freshfields Bruckhaus Deringer, Restructuring and Insolvency Bulletin, [hereinafter Freshfields-Bulletin] Autumn 2002, available at http://www.freshfields.com/practice/finance/publications/newsletters/ribulletin/200211.pdf.

[54] Dr. Wolfgang Lueke, The New European Law on International Insolvencies: A German Perspective, 17 Bankr. Dev. J. 369, 380 (2001).

[55] Freshfields-EC Regulation, supra note 43, at 5.

[56] EC Regulation, supra note 10, art. 3(2).

[57] Id. art. 2(h).

[58] Id. art. 27.

[59] Freshfields-EC Regulation, supra note 43, at 6.

[60] Id. at 3.

[61] The period between the date of the debtor’s inability of the debtor to pay its debts and the date of the judgment initiating the insolvency proceedings is referred to as the “suspicious period” (periode suspecte). See generally Collier, supra note 50, § 22.05 (for a discussion of French bankruptcy procedure).

[62] 1985 law, art. 107 (These voidable transfers include transfers of any of the debtor's assets, if such transfer is gratuitous or for inadequate consideration, payment of any debts before they become due, and the grant of a mortgage or pledge as security for a debt that arose prior to the grant of the security).

[63] See also Collier, supra note 50, § 22.05(3)(b).

[64] German Insolvency Code (Insolvenzordnung) § 130; See generally Collier, supra note 50, § 23.04(15).

[65] Collier, supra note 50, § 22.05(3)(a).

[66] Id.

[67] Id.

[68] §14(1) of the German Insolvency Code provides that a creditor may file a petition for an insolvency proceeding only if the creditor has a legal interest in the commencement of the insolvency proceeding and proves its claim as well as the reason for the initiation by prima facie evidence. A creditor is prohibited from requesting the opening of an insolvency proceeding if its claim is fully covered by a security right in rem. Another restriction is that only the debtor may file a petition for an insolvency proceeding based on an impending illiquidity.

[69] §70(1) of the Austrian Bankruptcy Code (Konkursordnung) allows a creditor to file a petition for an insolvency proceeding if the creditor has a claim against the debtor and if the debtor is illiquid.

[70] Under §124 of the Insolvency Act, a creditor may file a petition to open a liquidation proceeding whether it is an existing creditor whose debts have already become payable or a prospective creditor. The liquidation is deemed to have commenced on the date of the filing of the petition.

[71] Collier, supra note 50, §28A.05(3)(b) (Creditors may apply to the tribunal for the declaration of bankruptcy of the debtor through a written petition. The petition must include the name of the debtor, the debtor's activity, the insolvency, and all documents useful to prove the credit and the insolvency).

[72] EC Regulation, supra note 10, art. 3(4)(b).

[73] Id. art. 3(4)(a); see also Collier, supra note 50, §43.03(2) (For example, if the criteria for opening an insolvency proceeding under the domestic law of the Member State in which the debtor has its center of main interests (i.e. minimum indebtedness) cannot be satisfied).

[74] EC Regulation, supra note 10, art. 36.

[75] Id. arts. 16(1), 17(1) (Article 17(1) provides that recognition shall occur “with no further formalities” and that the judgment of the foreign court shall “produce the same effects in any other Member State as under the law of the State of the opening of proceedings”).

[76] Id. art. 26.

[77] Lueke, supra note 54, at 378.

[78] Collier, supra note 50, §22.05(1)(g).

[79] EC Regulation, supra note 10, art. 18(1).

[80] Id.

[81] Id. art. 18(2).

[82] Id. art. 18(3).

[83] EC Regulation, supra note 10, art. 32(2); Lueke, supra note 54, at 399.

[84] EC Regulation, supra note 10, art. 33(1).

[85] Id. art. 34(3).

[86] Id. art. 35.

[87] Lueke, supra note 54, at 401.

[88] EC Regulation, supra note 10, arts. 31(1), (2).

[89] Lueke, supra note 54, at 400.

[90] EC Regulation, supra note, art. 6.

[91] Black’s Law Dictionary, supra note 2, at 1372.

[92] Collier, supra note 50, §22.06(6).

[93] Id.

[94] Germany: If a secondary proceeding were to be commenced in Germany, the creditor would also be able to set-off their claims. Sections 94-96 of the German Insolvency Code provide that the insolvency creditors’ right to set-off is not affected by the filing or the petition or by the court’s order of commencement. However, set-off is not permissible (1) if the creditor becomes a debtor of the estate only after proceedings have commenced, (2) if the creditor acquires its claim from another creditor after proceedings have commenced, or (3) if it acquires the right of setoff by means of a voidable transaction; Italy: Creditors have the right to setoff their credits and debits towards the debtor if such obligations did not mature before the date of bankruptcy. Setoff is not permitted if the creditor acquired the credit within the term of one year before the date of bankruptcy or after such date; Austria: The Austrian Bankruptcy Code (Konkursordnung) provides in Section 20(1) that set-off is permissible if the claim and the debt were offsettable at the time of opening of the bankruptcy proceeding. Furthermore, setoff is not possible, if the creditor has acquired its claim during the last six months prior to the opening of bankruptcy proceedings, if at that time the creditor knew or should have known about the illiquidity of the other party (the eventual bankruptcy debtor); England & Wales: Under Rule 4.90 of the Insolvency Rules 1986, set-off of mutual debts is mandatory in all liquidations and cannot be excluded by agreement between the parties. However, set-off is available only in respect of debts that are proved in the liquidation, so that if a secured creditor elects to rely on its security and not prove its debt, that debt will not be subject to any right of set-off.

[95] Lueke, supra note 54, at 390.

[96] EC Regulation, supra note 10, art. 5(1); Article 5(2) provides that “rights in rem” particularly mean rights to “a) dispose assets or have them disposed of and to obtain satisfaction from the proceeds of or income from those assets, in particular by virtue of a lien or a mortgage; b) the exclusive right to have a claim met, in particular a right guaranteed by a lien in respect of the claim or by assignment of the claim by way of a guarantee; c) the right to demand the assets from, and/or to require restitution by, anyone having possession or use of them contrary to the wishes of the party so entitled; d) a right in rem to the beneficial use of assets.”

[97] Article 2(g) provides that the lex situs in the case of tangible property shall be the law of the Member
State where the property is situated, in the case of property and rights ownership of or entitlement of which must be entered in a public register the law of the Member State under the authority of which the register is kept, in the case of claims the law of the Member State within which the third party required to meet the claims has its center of main interest.

[98] Prof. Bob Wessels, Presentation: Case re EU Insolvency Regulation, available at http://www.iiiglobal.org/country/european_union/EUcaseIIIforum.pdf, at 6

[99] Lueke, supra note 54, at 387-389.

[100] Id. at 388.

[101] Id.

[102] Westbrook, supra note 22, at 18 (The hotchpot rule stands for the rule that “a creditor that receives a distribution in a foreign insolvency proceeding must stand aside in a local distribution until creditors of the same class (under local law) have gotten as much from the local proceeding as the first creditor got from the foreign one”).

[103] EC Regulation, supra note 10, art. 20.

[104] Lueke, supra note 54, at 397.

[105] See Evan D. Flaschen et al., Foreign Representatives in U.S. Chapter 11 Cases: Filling the Void in Law of Multinational Insolvencies, 17 Conn. J. Int’l. L. 3 (2001); In recent years, the use of foreign representatives has filled the void of international insolvency laws, not only in the United States. The landmark example for the global use of foreign representatives is the Singer insolvency, which involved a company with business operations in 150 countries. While a meltdown was expected, one year after the filing of Chapter 11 bankruptcy in the United States, the company had been reorganized and was revitalized. The U.S. Bankruptcy court appointed several foreign representatives who either acted on behalf of the estate as debtors-in-possession or, in countries which were suspicious of the debtor-in-possession management, as the debtor’s representatives working in conjunction with foreign administrators to coordinate a consistent approach to the overall corporate group.

[106] Ancillary proceedings are secondary insolvency proceedings auxiliary to, subordinate to, or in aid of the main insolvency proceeding.

[107] 11 U.S.C. §304 (2000).

[108] The principle of comity denotes a courts’ or jurisdiction’s willingness to give effect to laws and judicial decisions of another state or jurisdiction, not as a matter of obligation but out of deference and mutual respect; See also Bufford, supra note 22, at 36-43.

[109] See Ronald J. Silverman, Cross-Border Insolvency Cooperation Protocols, 33 Tex. Int’l. J. 587 (1998); The American Law Institute Transnational Insolvency Project provides for the use of cooperation protocols in cross-border insolvencies involving the three Member States of the North American Free Trade Agreement (NAFTA). The administrators in parallel insolvency proceedings should cooperate in all aspects of the case. Such cooperation is best arranged by an agreement or protocol that establishes decision-making procedures. A protocol for cooperation should at a minimum include provisions for coordinated court approval of decisions and actions when required and for communication with creditors as required under each applicable law; See also James P. George, International Parallel Litigation- A Survey of Current Conventions and Model Laws, 37 Tex. Int’l. L.J. 499, 521-22 (2002).

[110] See Armco Inc. v. North Atl. Ins. Co. (In re Bird), 229 B.R. 90, 94 (Bankr. S.D.N.Y.); see also Bufford, supra note 22, at 27.

[111] Bufford, supra note 22, at 31.

[112] 11 U.S.C. § 304(b)(1) (2000).

[113] Id.

[114] In re Toga Mfg. Ltd., 28 B.R. 165, 167 (Bankr. E.D.Mich. 1983).

[115] Bufford, supra note 22, at 29.

[116] See Cunard S.S. C. v. Salen Reefer Servs. AB, 773 F.2d 452, 459-460 (2d Cir. 1985) (finding Swedish bankruptcy law sufficiently comparable to that of the United States so that comity could be extended); see also Lindner Fund v. Polly Peck Int’l. PLC, 143 B.R. 807 (Bankr. SDNY 1992) (holding that in the U.S., there is a presumption that foreign bankruptcy proceedings are fair and comport with American notions of due process); Allstate Life Ins. V. Linter Group, 994 F.2d 996 (2d Cir. 1993) (noting differences between Australian bankruptcy law and that of the United States but not finding them sufficient to deny comity).

[117] In re Hashim, 213 F.3d 1169, 1171-1172 (9th Cir. 2000).

[118] Restatement (Second) of Conflict of Laws § 98 cmt. c (1971).

[119] Soc’y of Lloyd’s v. Ashenden, 233 F.3d 473, 477 (7th Cir. 2000).

[120] Anthony M. Vaddallo, et al., Cross-Border Insolvency and Structural Reform in a Global Economy, 35 Int’l. Law. 449, 452-53 (2001).

[121] See Bridgeway Corp. v. Citibank, 201 F.3d 134 (2d Cir. 2000) (in which the court concluded that while in theory Liberia had a system inherited by the United States, the fact that this judicial system broke down during the civil war raised doubt about the possibility that proper safeguards would be ensured and, therefore, the judgment of a Liberian court was not enforceable).

[122] Silverman, supra note 109, at 589 (“The Protocols that have been implemented to date have been influenced both by considerations of universality and certain constraints of territoriality. They strive, in the first instance, to promote an efficient, worldwide coordination and resolution of multiple insolvency proceedings. At the same time, they serve to protect fundamental, local rights material to each of the legal fora involved”); see also Tina L. Brozman & Denise R. Polivy, Concurrent, Same Entity, Cross-Border Insolvency Proceedings, Practicing Law Institute, Order No. A0-004D, April 2000, at 889-893

[123] Id. at 590.

[124] Id.

[125] Id. at 591, 598-99.

[126] E. Bruce Leonard, The Way Ahead: Protocols in International Insolvency Cases, 17-Jan Am. Bankr. Ist. J. 12 (1999) (discussing the cross-border insolvency protocol between the United States and the United Kingdom in In re Maxwell Communication and the cross-border insolvency protocol in In re Solv-Ex Corporation between the Alberta Court of Queen’s bench and the U.S. Bankruptcy Court for the District Court of New Mexico).

[127] Id. (discussing the cross-border liquidation protocol in In re AIOC Corporation and AIOC Resources AG between the United States and Switzerland).

[128] Silverman, supra note 109, at 600.

[129] Robert K. Rasmussen, A New Approach to Transnational Insolvencies, 19 Mich. J. Int’l. 1, 30 (1997).

[130] Flaschen, supra note 105, at 8.

[131] Id. at 9.

[132] Id.

[133] Id. at 13-14.

[134] Id.

[135] John F. Dolan, The Law of Letters of Credit: Commercial and Standby Credits §12.02(1)(a) (1996).

[136] Freshfields Bruckhaus Deringer, Restructuring and Insolvency Bulletin, Summer 2001,[hereinafter Freshfields-Bulletin] available at http://www.freshfields.com/practice/finance/publications/newsletters/ribulletin/952.pdf, at 3.

[137] Basel Committee, supra note 6, at 1.

[138] Examples of such “bail-outs” include the Italian government’s rescue of Banco Ambrosiano and Banca di Napoli, the Norwegian government’s rescue of Christiana Bank and Fokus Bank in 1991, or the Swedish government’s intervention to support Nordbanken between 1991 and 1993; See generally Gerard Caprio, Jr. & Daniela Klingebiel, Bank Insolvencies: Cross-Country Experience (World Bank Policy Research Working Paper No. 1620, 1996), available at http://www.econ.worldbank.org/files/13381_wps1620.pdf.

[139] Hüpkes, supra note 12, at 2 (Following the collapse of the German Herstatt Bank in 1974, the Basel Committee on Banking Supervision was established. In 1975, the Basel Committee adopted the Basel Concordat which was revised in 1983 after the failure of Banco Ambrosiano. The Basel Committee’s minimum standards for the supervision of international banking groups, the European Council Directive 92/30/EEC on the supervision of credit institutions were adopted following the BCCI failure).

[140] France: Court-ordered liquidation procedures before a French court may be initiated with regard to credit institutions only after an opinion from the Commission Bancaire.[140] If a liquidation procedure with regard to a credit institution is initiated or ordered by the court, the Commission Bancaire will appoint a liquidator who shall draw up an inventory of assets and carry out liquidation operations; Italy: Insolvent banks in Italy are liquidated in an administrative winding up proceeding (liquidazione coatta amministrativa). This special proceeding is a minor liquidation procedure that is the equivalent of bankruptcy for enterprises whose activity is of public interest and is applicable only to specific entrepreneurs, principally banks,[140] insurance companies, and auditing and trust companies. The declaration of insolvency is made by the court of the principal place of business of the enterprise, upon a petition filed by a creditor. Before issuing its decision, the tribunal must summon the legal representative of the enterprise to appear in chamber to be heard and ask for the opinion of the administrative authority having the surveillance of the enterprise. As from the date of the decree of liquidation, the estate is taken over by a commissioner (commissario liquidatore) appointed by the authority with the same decree of liquidation.[140] The commissioner holds all powers to liquidate the assets, subject to those limitations or instructions given by the administrative authority.; Germany: German banking law bars the initiation of insolvency proceeding against banks by creditors. Article 46b of the German Banking Act provides that a petition for the initiation of insolvency proceedings over the institution’s assets may be filed by the Federal Banking Supervisory Office only. The filing of an insolvency petition empowers the court to implement all measures necessary to protect against any adverse change in the debtor's assets until a decision with respect to the petition is made. Those measures usually include the appointment of a receiver and the issuance of an order enjoining the debtor from transferring assets, or an order stipulating that transfers shall be effective only with the consent of the receiver; Austria: The Austrian Banking Act provides in § 82(4) that, if a bank has been placed under supervision, only the bank supervisor can petition for bankruptcy. However, if the bank has not been placed under supervision, insolvency proceedings can be initiated by creditors pursuant to the general bankruptcy law. Under general bankruptcy law, A creditor may apply for the opening of bankruptcy proceedings, if the creditor can demonstrate: first, that the creditor has a claim against the debtor; and second, that the debtor is illiquid.

[141] In most European jurisdictions, the administration of bank insolvency proceedings is considered as a judicial function. Some jurisdictions provide for special court-administered bankruptcy proceedings under the banking law; among these are Austria, Luxembourg, and the Netherlands. In other jurisdictions, such as France, Germany and the United Kingdom, banks are subject to general court-administered bankruptcy proceedings.

[142] See Collier, supra note 50, §28A.06(1) (The administrative winding up of a bank is governed by Articles 194 through 215 of the Italian Bankruptcy Law).

[143] 12 U.S.C. § 3102(i) (1994).

[144] See Richard Herring, International Financial Conglomerates: Implications for Bank Insolvency Regimes, July 2002, available at http://www1.worldbank.org/finance/assets/images/Herring--intl_finan_conglom-doc.pdf, at 19; During the BCCI cross-border insolvency, France applied the separate-entity approach during the liquidation of BCCI’s subsidiaries located in France.

[145] Basel Committee, supra note 6, at 9.

[146] Id. at 2.

[147] Id.

[148] Id.

[149] Id. at 9.

[150] Id. at 9-10.

[151] Id. at 2.

[152] Id.

[153] See generally Hüpkes, supra note 12, at 27-31 (for a discussion of cross-border insolvencies of multinational banks).

[154] Paul J. Omar, The Landscape of International Insolvency Law, 11 Int’l. Insolv. Rev. 173, 177 (2002).

[155] Id. at 178.

[156] Id.

[157] Collier, supra note 50, § 14A.06(a), (b).

[158] Id. (Austria has also concluded similar bilateral treaties with Belgium, France, Italy, the United Kingdom, and Turkey).

[159] For example, a foreign creditor has to be aware of the significantly varying procedures regarding the time period in which it will be able to lodge its claims with the foreign tribunal. In Germany, foreign creditors must submit their claims within a time limit set by the court, usually between two weeks and three months after the order initiating has been published in the Federal Register (Bundesanzeiger); In Austria, Article 74(2) of the Austrian Bankruptcy Code provides that the order of the Austrian court opening the insolvency proceeding must include the time limit within which creditors must file their claims. Since 2000, these court orders are made available through the internet; In Italy, within one month from the appointment of the commissioner in an administrative winding up proceeding, the commissioner notifies in writing each creditor about the liabilities resulting from the accounts of the enterprise. The creditors may submit their comments or requests to the commissioners within fifteen days from the notice. The creditors who were not notified and those who look for repossession of goods must submit their claim to the commissioner within sixty days from the publication of the liquidation decree in the Official Gazette (Gazzetta Ufficiale). In France, within fifteen days of the issuance of the order commencing the proceeding, the creditors' representative or the liquidator must notify the creditors whose credits are recorded in the bankruptcy company's accounts that they must submit their claims within two months of the publication of the bankruptcy judgment in the BODACC (Bulletin Officiel des annonces Civiles et Commerciales). Article 66 of the 1985 Decree provides that creditors domiciled outside of France have an additional two months to submit their claims (Article 66, 1985 Decree).

[160] Laurent Gaillot, Effects of Foreign Bankruptcy Judgments and Powers of Foreign Receivers – A French Perspective, in Current Issues in Cross-Border Insolvency and Reorganisations (E. Bruce Leonard & Christopher W. Besant, eds. 1994) 246.

[161] Collier, supra note 50, §22.08(3).

[162] Neil Cooper & Rebecca Jarvis, Recognition and Enforcement of Cross-Border Insolvency 37 (1996); see also International Law Office, Insolvency-France: Spotlight on Transnational Bankruptcy, available at http://www.europeanlawoffice.com [hereinafter International Law Office-France] (This standard was set forth by the Cour de Cassation in the Münzer decision).

[163] Collier, supra note 50, §22.08(3).

[164] Id.

[165] Id.

[166] Id.

[167] Gaillot, supra note 160, at 256.

[168] Jarvis, supra note 162, at 38.

[169] Id.

[170] Such preliminary orders include the issuance of a stay order by the court, which prevents the debtor from disposing of his assets.

[171] International Law Office-France, supra note 162.

[172] Collier, supra note 50, §14A.06(2)(b).

[173] Id.

[174] Id.

[175] Manfridi Burgio, Cross-Border Insolvency – an Italian Approach, 8 Int’l. Insol. Rev. 39 (1999).

[176] Id. at 43; see also Collier, supra note 50, §28A.11(1).

[177] Id.

[178] Burgio, supra note 175, at 44.

[179] German Insolvency Code, art. 35 (1999); see also Felsenfeld, supra note 21, at 1-87 (In a pivotal decision in 1985, the German Court of Justice (Bundesgerichtshof) established that German courts will recognize a Swiss bankruptcy proceeding if the following criteria are met: 1) the foreign proceeding is a real civil bankruptcy proceeding, not an administrative procedure, and is aimed at the distribution of the debtor’s assets among the creditors; 2) the Swiss court issuing the order must have jurisdiction analogous to that granted to German district courts in whose district the debtor has its business establishment; 3) the foreign decree must be valid under its own law and essentially consistent with German law; 4) the foreign order cannot conflict with the German Basic Law, meaning that debtors must be given the right to be heard and the right to due process; and 5) the foreign decree must contemplate that it will be enforced internationally (this implies that Germany will only enforce an order from a court situated in a country that applies the universality principle).

[180] Collier, supra note 50, §23.07(3).

[181] Id.

[182] Introductory Law to the German Insolvency Code (Einführungsgesetz zur Insolvenzordnung), art. 102(1).

[183] Collier, supra note 50, §23.07(4).

[184] Id.

[185] Id. at §23.07(5).

[186] Jarvis, supra note 162, at 43 (The German insolvency proceeding will not be treated as an ancillary proceeding and is not affected by the judgment of the foreign court and is resolved in accordance with the German Insolvency Code. As a result, foreign law will seldom be applied with respect to assets in Germany because German creditors prefer to participate in a proceeding governed by German law instead of participating in the foreign proceeding where they need to rely on foreign counsel. This clearly suggests that this part of the German treatment of cross-border insolvency is influenced by the territoriality principle).

[187] Alexander Trunk, German International Insolvency Law Under the New Insolvency Code, in Legal Aspects of Globalization 193-94 (Jürgen Basedow & Toshiyuki Kono, eds. 2000).

[188] Id. at 194.

[189] Jarvis, supra note 162, at 43 (The foreign creditor does not have to prove again that the debtor is insolvent and the German court will recognize the insolvency solely on the basis that a foreign insolvency proceeding has commenced).

[190] Id. at 31.

[191] Id. at 34.

[192] Id.

[193] Id; see also Robin Dicker & Nick Segal, Cross-Border Insolvencies and Rescues: The English Perspective, 8 Int’l. Insol. Rev. 127 (Under Section 426 of the Insolvency Act of 1986, English courts are mandated to assist foreign courts. However, English courts have found ways to avoid this statutory obligation. In Felixstowe Dock and Railway Corporation v. United States Lines,[193] the debtor, a Delaware corporation, initiated Chapter 11 proceedings in the Unites States. The U.S. court issued an automatic stay which, as a matter of U.S. law, enjoyed worldwide effect. The court rejected to enforce the stay order against British creditors because the Chapter 11 proceedings were designed to reorganize only the corporation’s operation in North America and not Europe and as such would provide no benefit for the creditors in England).

[194] Jarvis, supra note 162, at 31.

[195] The jurisdictions include Anguilla, The Bahamas, Bermuda, Botswana, Brunei Darussalam, Canada, Cayman Islands, Falkland Islands, Gibraltar, Hong Kong, Ireland, Malaysia, Montserrat, New Zealand, St. Helena, South Africa, Turks and Caicos Islands, Tuvalu, and the Virgin Islands.

[196] Collier, supra note 50, §21.06(4).

[197] Council Directive 2001/17/EC of 19 March 2001 on the reorganization and winding up of insurance undertakings, 2001 O.J. (L 110/28) 28.

[198] Council Directive 2001/24/EC of 4 April 2001 on the reorganization and winding up of credit institutions, 2001 O.J. (L 125/15) 15.

[199] Ralph H. Folsom, European Union Law 49-52 (3rd ed. West Nutshell Ser. 1999).

[200] Id.; see also Treaty Establishing the European Community, art. 189, Nov. 10, 1997, O.J. (C 340) 3 (1997), amended by Treaty of Amsterdam Amending the Treaty on European Union, the Treaties Establishing the European Communities and Certain Related Acts, Oct. 2, 1997, (C 340) 1 (1997) (now article 249).

[201] Credit Institutions Directive, supra note 197, art. 34(1).

[202] Id. art. 1(1).

[203] Freshfields-Bulletin, supra note 53, at 3.

[204] Id. art. 1(2).

[205] Id. art. 3(1), 9(1).

[206] For the purposes of defining “home Member State”, the EC Directive refers to definition given in Article 1(6) of the European Parliament Directive 2000/12/EC relating to the taking up and pursuit of business credit institutions.

[207] Enrico Galanti, The New EC Law on Bank Crisis, 11 Int’l. Insol. Rev. 49, 56-57 (2002).

[208] Id. at 57.

[209] Id.

[210] The term “branch” is defined as “a place of business which forms a legally dependent part of a credit institution and which carries out directly all or some of the transactions inherent in the business of credit institutions; any number of places of business set up in the same Member State by a credit institution with headquarters in another Member State shall be regarded as a single branch.”

[211] European Council and European Parliament Directive 2000/12/EC relating to the taking up and pursuit of the business of credit institutions, Mar. 20, 2000, O.J. (L 126) 1 (2000), art. 1(7).

[212] Credit Institutions Directive, supra note 197, art. 12(1).

[213] Id. art. 9(1).

[214] Id. art. 10.

[215] Id. arts. 20, 21.

[216] Id. recital 17; see also Galanti, supra note 207, at 59.

[217] Evelyn H. Biery, Ancillary Relief Granted in a Russian Bank Case, 20-Feb Am. Bankr. Inst. J. 24 (2001).

[218] Id.

[219] Credit Institutions Directive, supra note 197, arts. 4, 9(1).

[220] Galanti, supra note 207, at 57-58.

[221] Id. at 63.

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