The Raging Debate Between Territorial and Universal Theories of Value Sharing in International Bankruptcy

Abstract

This paper (an excerpt from a forthcoming book on cooperation in international insolvency) analyzes the theoretical debate between the two main polar alternatives in the administration of international insolvency (bankruptcy): "territorialism" and "universalism." When financial distress strikes a business with assets and creditors in more than one national jurisdiction, the challenges of insolvency administration are heightened significantly. In the context of domestic insolvency, it is well accepted that individual claimants (and courts) yield to collective enforcement coordinated by one court with jurisdiction over all claims against the debtor's assets. When the challenges of insolvency administration arise in an international context, however, many nations abruptly abandon their support for collective compromise. Nations are less willing in general to subjugate the interests of "local" creditors to a broader compromise with "foreign" creditors, especially if that compromise is managed by foreign authorities. Resistance to cross-border cooperation is most often rooted in (or defended in terms of) appeals to sovereignty. In recent years, however, international practitioners and theorists have begun to make inroads into this "territorial" philosophy and the strictures of national sovereignty. A rapidly solidifying dedication to norms of "universal" cooperation and coordinated international compromise has swept over the cross-border insolvency landscape. This paper discusses the weaknesses of the historical territorial approach, especially in terms of its reliance on theories of sovereignty, thus revealing one perspective on why universalism has gained so much traction in recent legislative, jurisprudential, and practical developments in international bankruptcy (as further explored in the rest of the forthcoming book).