Harmonizing Choice-of-Law Rules for International Insolvency Cases: Virtual Territoriality, Virtual Universalism, and the Problem of Local Interests

Abstract

This paper explores the potential content and feasibility of a set of harmonized choice of law rules (HICOL Rules) that would apply in insolvency proceedings. It contemplates a main insolvency proceeding opened in a debtor’s center of main interests (“COMI”) and the existence of (or possibility of opening) one or more non-main (or secondary) proceedings. It also contemplates the possibility that an insolvency representative in a main or non-main proceeding may seek and be granted recognition in another state under the UNCITRAL Model Law on Cross-Border Insolvency (codified as Chapter 15 of the Bankruptcy Code in the U.S.) Under HICOL Rules, as to any given issue of insolvency law and as it may relate to any particular asset, the same rule of insolvency law would apply regardless of whether the matter is addressed by the court in a debtor’s main proceeding, in a non-main proceeding, or in another forum. HICOL Rules could accommodate the application in a main proceeding of the insolvency law of a jurisdiction other than the COMI (virtual territorialism) and the application in a non-main proceeding of the insolvency law of the COMI (virtual universalism). The HICOL Rules proposed here would embrace the baseline rule that the insolvency law of the COMI applies to a debtor and its assets, wherever located. However, the HICOL Rules would respect appropriate local interests by applying the insolvency law of another jurisdiction to certain assets located in that jurisdiction. In general, under these HICOL Rules the non-COMI insolvency law would apply only to assets related to an establishment of the debtor located outside the COMI. However, even as to those establishment-related assets, the reorganization or rehabilitation provisions of the COMI insolvency law would apply. Finally, in addition to its focus on establishment-related assets as a general proxy for the identification of local interests, the paper offers some tentative suggestions relating to other issues that comprehensive HICOL Rules should address. These include the additional (and sensitive) issues concerning in rem rights, such as security interests and real property (immovables), setoff, reciprocal (i.e., executory) contracts, and employment contacts.

Keywords: Corporate insolvency & reorganization, harmonized choice of law rules, HICOL, UNCITRAL Model Law on Cross-Border Insolvency, uniformity of rule application, local assets and interests, security interests, multi-national enterprises, main insolvency proceedings, non-main insolvency proceedings

JEL Classification: F23, F34, F53, G33, K12, K22, K33