Cross Border Bankruptcies

The modern organizations are multi-national in nature. This means that they seldom conduct business is only one nation. Rather, they have assets, liabilities, and other business interests that are spread out across several nations. This arrangement works fine as long as the company is in operation and can continue to pay its bills. However, this becomes a problem when the company starts defaulting on its debt. Filing for bankruptcy becomes a complicated process in such cases.

These cases are referred to as cross border bankruptcies. The different countries of the world are still trying to come to common ground when it comes to cross border bankruptcies. However, they are facing several challenges. In this article, we will discuss the main challenges facing this issue as well as the steps being taken to overcome them.

Challenges Faced During Cross Border Bankruptcy

The following challenges are commonly faced during cross border bankruptcy:

  • The international laws related to bankruptcy have very little in common. Some countries around the world try to help debtors reorganize their business and continue as a going concern. At the same time, there are a lot of other countries where the law is only concerned with the liquidation of the assets in order to satisfy the claims of the creditors. Since there is a lot of disparity between laws, there is a lack of communication which generally leads to sub-optimal outcomes

  • The lack of uniform laws is not the only hindrance. The costs of bankruptcy also vary widely from country to country. Also, the time frame within which the bankruptcy proceedings will be concluded varies significantly across countries. The uncertainty related to cross border bankruptcies is a major impediment that restricts the cross border movement of capital around the world.

  • The treatment of the different types of creditors is different in different regimes. This is particularly true when unsecured credit is extended. It is because of complex insolvency laws that cross border suppliers insist on involving intermediaries such as banks and also on financial arrangements such as letters of credit.

  • Many countries have attempted to harmonize bankruptcy laws to facilitate better movement of goods and capital. However, they have not been very successful in this regard. Only countries that have similar laws like the European Union have been able to harmonize their laws to some extent. The United Nations has also taken up the initiative to develop model laws to better facilitate cross border bankruptcies.

Initiatives Taken to Harmonize the Laws

Several initiatives have been taken in order to harmonize the laws between different nations. Some notable examples are mentioned below:

  • The first attempt to harmonize laws was made as far back as 1989. In 1989, a committee called the Model International Insolvency Cooperation Act (MIICA) was formed. This committee tried to streamline the international insolvency process. It was a model that attempted to harmonize the domestic laws of member states. It was not given much importance back then. However, MIICA set the stage for later laws by creating awareness that such a need existed.

  • In the 1990s, a Cross Border Insolvency Concordat was developed in order to harmonize the process of international bankruptcy. The Concordat was adopted by a handful of countries such as the United States, Switzerland, Israel, England, Bahamas, Bermuda, and the Cayman Islands.

    Countries like Bahamas and Bermuda might seem insignificant, but they are not. This is because a large number of multi-national companies are registered in these islands since they are tax havens.

    It needs to be understood that the laws proposed by the Concordat were not binding. Instead, the Concordat only gave a set of guidelines that were to be followed by the courts, and the method of their application was left to the judges. This is what made this method extremely successful in solving disputes between countries that did not have treaties amongst themselves.

  • Finally, in 1997, the United Nations took cognizance of the problem and created the UNCITRAL model law. This model law was set up only after extensive negotiations between representatives of over 72 countries and 10 intra-governmental bodies.

    The UNCITRAL is a model that explains how different courts across the world should co-operate with one another in order to protect the rights of all stakeholders, including foreign creditors. Right now, different countries around the world are formulating their own bankruptcy and insolvency laws, which are based on the UNCITRAL.

    The UNCITRAL existed prior to 1997 as well. However, it only rose to prominence when a large number of countries accepted its conditions in 1997. The UNICTRAL meets twice every year, once in Vienna and once in New York. This is done to discuss the new issues in the assembly and also to create new guidelines to enable member nations to deal with them in a better manner.

The bottom line is that with the advent of international companies, international bankruptcies have also become quite common. Hence, there is a need for a commonly agreed-upon framework to simplify the bankruptcy process.


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