The EU Regulation on Insolvency Proceedings ignores insolvency in the context of a multinational group of companies including banks and financial institutions. Internationally, most jurisdictions do not have insolvency laws specifically developed to address corporate groups and there is an absence of a coherent definition for domestic or international groups.351 During the GFC, certain large insolvency cases involving multinational enterprises organized as corporate groups made it clear that the issues of group insolvency need to be dealt with at an international level.352 When these regimes first appeared, there was consensus that it would be virtually impossible to reconcile the need for an effective international approach and pressure at the level of national jurisdictions to enforce a separate national treatment for each company in the group.353 Both regimes confine their application to a much less frequent and, as a practical matter, much less important situation in which the insolvent debtor (a legal entity) is a single corporation with assets or creditors in more than one national jurisdiction.354 Lastra stated that the absence of a group-wide approach could lead to the failure of subsidiaries or the entire group, which could otherwise have been reorganized and remained wholly or partially solvent.355
In respect of the EU Insolvency Regulation, Mazzoni noted that its rigidity has caused the proliferation of certain legal problems in cases in corporate groups with assets or liabilities in more than one Member State producing legal uncertainties and encouraging forum
349
Omar, above n347, 178-180.
350 Nicholaes W.A. Tollenaar, ‘Dealing with the Insolvency of Multinational Groups under the European
Insolvency Regulation’, (2010) 23(5) Insolvency Intelligence 65, 66.
351 Mevorach, above n322, 330. 352
Ibid.
353 Alberto Mazzoni, ‘Cross-border Insolvency of Multinational Groups of Companies: Proposals for an
European Approach in the Light of the UNCITRAL Approach’, (2010) 24(4) Dritto del Commercio Internazionale 755, 755-756.
354
Ibid, 756.
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shopping.356 Although the rules for COMI are designed to prevent manipulation,357 Wessels is of the opinion that the current impetus of the EU law mandates for the admissibility of forum shopping. It is usually more difficult to move a centre of main interest across a border than a registered office or to move the factual criteria that constitute the company’s centre to another country.358 Gelter notes that in Europe, the substantive rules of bankruptcy may lend themselves to actual regulatory competition, which implies states adapting their law to attract insolvency filings, may also be possible.359 According to LoPucki, judges are motivated by the glamour of handling ‘celebrity’ bankruptcies and their increased standing in the legal community resulting from these. Gelter further notes that shopping between different European bankruptcy regimes may create regulatory arbitrage.360 There is the problem that firms cannot commit to insolvency proceedings in a particular jurisdiction to their creditors as the decision of the applicable legal regime is made only when insolvency proceedings are initiated. He argues that the European Insolvency Regulation offers ex-post forum shopping opportunities361 that reduce ex-ante predictability for creditors and therefore increases the agency cost of debt.362
The case for new European rules that address the cross-border insolvency of financial groups has been highlighted in the recent financial crisis of 2008.363 The exposure of European banks to the US sub-prime mortgage crisis had exacerbated the impact of the EU crisis on the cross-entity linkages in financial groups. As discussed in Chapter 1, the solvency of particular entities may be very much contingent upon the financial situation of other group members, and the extent of their integration as a group.364
356 Mazzoni, above n353, 757. 357
Wolf-Georg Ringe, ‘Forum Shopping under the EU Insolvency Regulation’, (2008) 9(4) European Organisation Law Review 579, 594.
358 H.C. Duursma-Kepplinger, ‘Aktuelle Entwicklungen in Bezug auf die Vorschriften uber die internationale
Eroffnungszustandigkeit nach der Europaischen Insolvenzverordnung’, 16 Deutsche Zeitschrift fur Wirtschafts- und Insolvenzrecht (2006), 177, 179.
359 Luca Enriques & Martin Gelter, ‘How the Old World Encountered the New One: Regulatory Competition
and Cooperation in European Corporate and Bankruptcy Law’, Harvard John M. Olin Center for Law, Economics, and Business Fellows’ Discussion Paper Series, Discussion Paper No. 19 (July, 2008), 52.
360
Ibid, 53.
361 Ibid, 59. 362 Ibid, 54.
363 Walter W. Eubanks, ‘The European Union’s Response to the 2007-2009 Financial Crisis’, August 13, 2010
viewed at <http://www.fas.org/sgp/crs/row/R41367.pdf> on February 11th, 2012.
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The initiatives by the EU and the Model Law address only internationally active affiliated enterprise systems.365 The law of affiliated enterprise systems concerns corporate groups where each member of the group is a separate and independent company with its own legal personality. The OECD includes subsidiaries and branches as affiliated enterprises.366 These legal entities are affiliated but independent.367 The presence of the parent corporation, its component parts, and the extent that it exercises control over the subsidiary are issues relevant to affiliated enterprise systems.368 It is the parent corporation that bears the economic risks of all group members and if the parent corporation becomes insolvent, the entire group breaks down economically and all group members become insolvent. In spite of this, the subsidiary has its own rights and incurs its own obligations. The rights of the subsidiaries are never simultaneously the rights and obligations of the parent corporation or of the group. The corporate group does not have a legal personality of its own. Apart from extremely rare cases of two equal holding corporations, affiliated enterprise systems internationally are based on the degree of “control” that one corporation exercises over another.369
The European countries have traditionally relied more on statutory law and these statutes have included provisions for affiliated enterprise systems.370 For example, the German Stock Corporations Act371 includes detailed provisions applicable to different forms of affiliation according to the nature of their association. At the core of these provisions is the concept of ‘konzerne’ (affiliated enterprise systems) which is defined as a group of enterprises joined by uniform management.372 The European legal systems and US case law373 show that control does not change the legal situation, especially not common law, private law and corporate law. The parent corporation’s exercising control over the subsidiary may produce problems when cross-ownership in various jurisdictions and different approaches to affiliated enterprise systems occur, as in international banks.374
365
Marcus Lutter, Book Reviews: Enterprise Law Corp. v Entity Law Inc- Phillip Blumberg’s Book From the Point of View of an European Lawyer, 960-961, (1990) 38 American Journal of Comparative Law 49, 52.Phillip I. Blumberg, American Journal of Comparative Law, 952..
366 Organisation for Economic Co-operation and Development, ‘Glossary of Foreign Direct Investment Terms
and Conditions’, viewed at <http://www.oecd.org/dataoecd/56/1/2487495.pdf> on February 7, 2012.
367 Lutter, above n365, 959. 368 Ibid. 369 Ibid, 952. 370 Ibid. 371 Ibid.
372 Ercklentz, Enno W., Jr, Modern German Corporation Law, (Dobbs Ferry/New York: Oceana Publications
Inc., 1979).
373
Ibid.
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Ultimately, the international financial crisis has given a powerful momentum to the initiatives aimed at making international rules in respect of the insolvency of international corporate groups375 and strengthened the case for new European rules. During the recent financial crisis, among policy makers and regulators, no-one was responsible for looking at the system as a whole.376 In a similar vein, it may be argued that the insolvency of multinational enterprise groups (MEG) implies taking a worldwide perspective.377 The group problem in the context of large, complex financial institutions will be discussed further in this chapter.