In the resolution of international banks, it may be argued that the universalist approach does not resolve the conflict of international jurisprudence. For example, the universalism approach of the European Insolvency Regulation does not contain a specific provision to address the question if and when two different courts in two different Member States both open main proceedings, both equally convinced that the COMI is in their respective jurisdiction.132 This is complicated when most national insolvency systems such as the United States, United Kingdom and Canada claim jurisdiction over the assets of a filing debtor wherever located, including assets located in different jurisdictions.133 LoPucki notes that the territorialist nature of modified universalism relieves courts of the non-forum country from the obligation to sacrifice domestic creditors’ interests for the benefit of foreign interests. However, unlike pure universalism, modified universalism introduces uncertainties that make predictability elusive.134 The modified universalism theory ‘recognises the problems of a global system where debtors can easily choose a substantive law that will govern their insolvency and that this may be contrary to the expectations of creditors.’135 The issue of uncertain distributional creditor outcomes occurs because, firstly, the regime or regimes that will distribute the debtor’s assets may depend on the jurisdiction in which the assets are located at the time of bankruptcy.136 Modified universalism could generate an insolvency proceeding in every country in which the debtor has assets, and possibly even more.137 Secondly, modified universalism does not address the key problem of identifying the
131 Bank for International Settlements, above n80, 17.
132 Bob Wessels, ‘International Jurisdiction to Open Insolvency Proceedings in Europe, In Particular Against
(Groups of) Companies, (Working Paper Series No. 19, Institute for Law and Finance, Johann Wolfgang Goethe-Universitat, 2003), 19.
133 Phillip R. Wood, Principles of International Insolvency, (Sweet & Maxwell Ltd, 1995), 50-51 (listing
England, United States, Argentina, Denmark, Finland, Norway and Sweden as claiming all assets globally and only Japan as limiting proceedings to territorial property).
134
LoPucki, above n104, 696.
135 Edward S. Adams & Jason K. Finke, ‘Co-ordinating Cross-Border Bankruptcy: How Territorialism Saves
Universalism’, 15 (2009) Columbia Journal of European Law 43, 51.
136 LoPucki, above n104, 729. 137
Ibid. For example a creditor or trustee might initiate proceedings in the United States to obtain discovery here, although the debtor has no assets in the United States.
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home country.138 The preference of most academic commentators would be a rule that the home country of the multinational provide the single forum, and controlling law, for handling all international insolvencies.139 Westbrook noted that the home country law is the one law that can be most reliably predicted in advance.140
In the context of international banks, modified universalism could necessitate dozens of complex proceedings.141 The individual components of a financial group will be subject to different authorities and legal proceedings in many jurisdictions. ‘Different domestic and foreign regulators and judicial or administrative insolvency authorities will claim competence over individual parts of the group and seize the assets of group companies in their jurisdictions.’142 The conduct of individual procedures with respect to individual group companies creates multiple intra-group claims which are likely to divert attention from the more significant goal of resolving the crisis most efficiently and with the lowest societal cost.143 The inefficiency of this conduct and its impact on societal cost was illustrated by the collapse of Lehman Brothers. When the Lehman Brothers Holding Company (LBHI) filed for Chapter 11 protection in the US, some of Lehman’s constituent legal entities were immediately put into insolvency or an equivalent procedure in other jurisdictions, thereby creating international conflict.144 As mentioned, the main Lehman holding company was incorporated in the US with operating subsidiaries in numerous countries. Judge Peck, the judge in charge of the LBHI proceedings in the US, issued an early order allowing the enterprise to continue operating under its pre-petition cash management system. However, the order did not prohibit the assets from being frozen by the laws of other jurisdictions as145
‘The cash management system and by extension, the operation of the entire enterprise was managed by a corporation whose COMI was undeniably in the US; but because
138
Ibid, 730.
139 Robert K. Rasmussen, ‘A New Approach to Transnational Insolvencies’, 19 (1997) Michigan Journal of
International Law 1, 26.
140 Jay Lawrence Westbrook, ‘Theory and Pragmatism in Global Insolvencies: Choice of Law and Choice of
Forum’, 65 (1991) American Bankruptcy Law Journal 457, 469.
141 Ibid.
142 Eva Hupkes, ‘Form Follows Function’- A New Architecture for Regulating and Resolving Global Financial
Institutions’, (2009) 10 (3) European Business Organisation Law Review 369, 375.
143
Ibid, 373.
144 Ibid.Chapter 11 is a chapter of the US Bankruptcy Code that enables reorganisation to occur under the
bankruptcy laws of the US.
145 Anthony V. Sexton, ‘Current Problems and Trends in the Administration of Transnational Insolvencies
Involving Enterprise Groups: the Mixed Record of Protocols, the UNCITRAL Model Insolvency Law, and the EU Insolvency Regulation’, 12 Chicago Journal of International Law 811, 820.
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COMI analysis focuses on the place of incorporation and operation of each member of the enterprise individually, multiple foreign proceedings were filed including, importantly, the main proceeding for Lehman Brothers International Europe (LBIE), which controlled most of Lehman’s European assets.’146
Ultimately, as illustrated by Lehman Brothers, the vast differences in insolvency regimes worldwide means that modified universalism will often lead to a refusal to cooperate, exacerbating jurisdictional conflict and efficiency concerns. The discrepancies between the applicable company and insolvency law would trigger additional bankruptcy costs, risk- inadequate credit contracts might be concluded, non-adjusting creditors exploited, and there would be repercussions for credit markets.147
However, in the resolution of international bank conflicts, the modified universalist model would give host countries the right, but not the obligation, to apply local resolutions to local branches of an international bank, while the home country addresses its overall resolution. International cooperation between jurisdictions with compatible resolution schemes would be possible using the modified universalism model. One key condition of this model is that there is equitable treatment of a bank’s creditors at all its entities in the home and host jurisdictions.148 A modified form of universalism would involve host authorities choosing to defer to and cooperate with a resolution suggested by the home country authorities provided that specific conditions are adhered to. At the international bank level, preconditions for a modified universalist approach may include:
1. equitable treatment of all creditors regardless of their jurisdiction. If creditors in host countries were likely to be penalised in a resolution brought by home country authorities, host countries would have a strong incentive to ringfence;
2. broad harmonization of resolution regimes across jurisdictions149
146
Ibid.
147 Horst Eidenmuller, ‘Abuse of Law in the Context of European Insolvency Law’, (2009) European Company
and Financial Law Review 1, 5.
148 Hupkes, above n142, 373. 149
Paul Tucker, ‘Resolution of Large and Complex Financial Institutions: The Big Issues’, (European Commission’s Conference on Crisis Management, 19 March 2010), 9.
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It may be further argued that unified modified universalism is needed to change resolution regimes when dealing with international banks. According to Edwards, unified modified universalism is a form of universalism that can transform the universalism frameworks currently dominating the academic literature in the resolution of conflicts in multinational financial groups. As mentioned, in modified universalism, there would be multiple insolvency proceedings in multiple countries that foreign jurisdictions would recognize as a main proceeding. In contrast, in a unified modified universalism regime, this would still be the case but one national authority controls every insolvency proceeding.150 Edwards further notes that unified modified universalism is more predictable than pure universalism because parties would only need to determine which country is the home and which is the host country, and not the control of the financial institution. From a domestic policy perspective, he argues that countries could still achieve their objectives with their insolvency laws while providing a mechanism for a unified insolvency proceeding.151
Finally, the European Union and numerous other countries have taken steps to develop a more universalist approach for bank crisis resolution. Cihak and Nier argue that the special resolution regimes across the EU have the potential to make an important contribution towards more effective resolution of cross-border group conflict. Across the EU, special resolution regimes are imperative to increasing the effectiveness of resolution within member countries, and contributing to more effective resolution of cross-border financial groups. However, the introduction of special resolution regimes would not be able to resolve all conflicts that might arise between the interests of different national authorities.152 In these circumstances, national priorities adopt a territorial approach where local assets are ringfenced for the benefit of depositors and creditors in the jurisdiction. For example, each subsidiary of Lehman’s former entities engaged in ringfencing to defend their own assets when the complexity of its structure proved too difficult to contend with.153
The collapse of Lehman Brothers and the Icelandic banks have made clear the need for a more universalistic approach to bank insolvency. The Basel Committee’s Cross-Border Resolution Group’s Report154 recommends a ‘middle ground approach’ that recognises the
150 Edwards, above n106, 43. 151 Ibid, 44.
152 Cihak & Nier, above n90, 27. 153
International Monetary Fund, above n18, 9.
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strong possibility of territorial ring-fencing in a crisis and which helps ensure that home and host countries, and financial institutions focus on needed resiliency within national borders. This approach may require discrete changes to national laws and resolution frameworks to create a more complementary legal framework that facilitates financial stability and continuity of key financial functions across borders.155
3.2 The Hybrid of Territorialism and Universalism: The Theory of Secondary