International Bankruptcy: In Defense of Universalism
Posted: 6 Feb 2001
This Article seeks to advance the debate regarding transnational bankruptcies by examining the single most contentious question that divides supporters of territorialism from advocates of universalism. To date, the primary objection to universalism has focused on the treatment of local creditors. The central concern is that a universalist regime may disadvantage local creditors by turning assets over to foreign bankruptcy courts. In an effort to move the debate forward, this Article addresses the question of local creditors and shows that when one takes local creditors into account, the case for universalism remains strong. It is clear that creditors that adjust the terms of their loans on a case by case basis earn a market rate of return regardless of the choice of law rule governing transnational bankruptcies. Any argument based on the treatment of creditors, therefore, must look to creditors that do not adjust the terms of their lending in this way. This Article analyzes the impact of universalism and territorialism on these non-adjusting creditors. It is shown that many such creditors are able to adjust the terms of their lending over their entire portfolio of loans, even though they do not adjust the terms of each individual loan. These "weakly non-adjusting creditors," are not harmed by universalism because they receive a market rate of return on their portfolio. In terms of the efficiency of the lending process, there is a distortion that is introduced by universalism in the presence of weakly non-adjusting creditors, but it is shown that the magnitude of this distortion is almost certainly small, and that territorialism causes a much larger efficiency loss. Overall, it is argued that territorialism offers local creditors very few benefits over universalism, and that universalism offers a more efficient regime, whose benefits are felt by debtors in the form of cheaper credit.
After demonstrating the weakness of territorialist claims regarding local creditors the Article responds to the other arguments advanced in defense of territorialism. It is shown that even when one focuses on the supposed benefits of territorialism universalism remains a superior rule for cross-border bankruptcy.
Keywords: bankruptcy, insolvency, international, non-adjusting creditors
JEL Classification: K0, K22
Suggested Citation: Suggested Citation