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International cooperation in bankruptcy and insolvency matters

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INTERNATIONAL
COOPERATION
IN BANKRUPTCY
AND INSOLVENCY
MATTERS


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INTERNATIONAL
COOPERATION
IN BANKRUPTCY
AND INSOLVENCY
MATTERS
A J O I N T RE S E A RC H PROJ E C T OF

A MERI CA N CO LLE G E OF B AN K RU PT C Y
A ND
I N T E RN AT I O N A L I N SOLV E N C Y
INSTITUTE
BOB WESSELS
BRUCE A. MARKELL
JASON J. KILBORN

1


1
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_____________________________________________
Library of Congress Cataloging-in-Publication Data
Wessels, B.
International cooperation in bankruptcy and insolvency matters / A joint research-project of American College of
Bankruptcy and International Insolvency Institute ; Bob Wessels, Bruce A. Markell, Jason J. Kilborn.
p. cm.
Includes bibliographical references and index.
ISBN 978-0-19-534017-4 ((hardback) : alk. paper)
1. Conflict of laws—Bankruptcy. I. Markell, Bruce A.
II. Kilborn, Jason J. III. International Insolvency Institute.


IV. American College of Bankruptcy. V. Title.
K7510.W47 2009
340.9’78—dc22
2009000025
_____________________________________________
1 2 3 4 5 6 7 8 9
Printed in the United States of America on acid-free paper
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Contents

Authors’ Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

xiii

About the Authors . . . . . . . . . . . . . . . . . . . . . . . . . . . . xv
Chapter 1 General Introduction

. . . . . . . . . . . . . . . . . . . . 1

A. Insolvency and Bankruptcy . . . . . . . . . . . . . . . . . . . . . . . 1
B. Roman Times

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

C. Middle Ages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
D. Commercial Code of Napoleon and the Rise of
General Bankruptcy Law . . . . . . . . . . . . . . . . . . . . . . . . 7
E.

Emerging Tendencies from History . . . . . . . . . . . . . . . . . . . 9

F.

Our Stance Today: Differences in National Legal Systems

. . . . . .

10

. . . . . . . . . .

13

A. Widely Accepted Broad Principles of Insolvency Systems . . . . . . .

13

1. Maximization of Asset Value for All Creditors . . . . . . . . . . .

14

2. Recognizing/Preserving Existing Creditor Rights . . . . . . . . . .

16

3. Equitable Treatment of Similarly Situated Creditors . . . . . . . .

16

B. Wide Disparities with Respect to Specific Procedures and Rules . . .

17

1. (Un)Equal Treatment of Prepetition Claims . . . . . . . . . . . .

18

a. Priorities and Preferred Claims . . . . . . . . . . . . . . . . .

18

b. Excluded Claims . . . . . . . . . . . . . . . . . . . . . . . .

21

c. Avoidance of Pre-Insolvency Transactions . . . . . . . . . . .

23

2. Maximizing Value in a Common Pool . . . . . . . . . . . . . . .

25

Chapter 2 Prominent Principles of Domestic Law

a. Included/Excluded Assets

. . . . . . . . . . . . . . . . . . .

26

v


b. Stay/Moratorium . . . . . . . . . . . . . . . . . . . . . . . .

29

c. Operation of the Business . . . . . . . . . . . . . . . . . . .

30

3. Preparation and Voting on a Plan of Reorganization

. . . . . . .

32

a. Flexibility and Options . . . . . . . . . . . . . . . . . . . . .

32

b. Who Drafts the Plan, Timing . . . . . . . . . . . . . . . . . .

33

c. Creditor Voting, Dissent, and Court Approval . . . . . . . . .

33

C. Principles-Based Approaches to Modernization and
Harmonization . . . . . . . . . . . . . . . . . . . . . . . . . . . .

35

Chapter 3 Guiding Approaches to International Insolvency Law . . .

39

A. The Basic Theoretical Divide: Territorialism v. Universalism

. . . . .

40

. . . . . . . . . . . . . . . . .

40

a. The Strained Process of Territorial Insolvency Administration . .

41

b. Sovereignty, Democracy, and a New Commercial Demos . . .

43

c. A Misfit Solution to an Outsized Problem

. . . . . . . . . . .

46

. . . . . . . . . . . . . . .

48

B. Weighing the Advantages and Practical Impediments of the
Competing Approaches . . . . . . . . . . . . . . . . . . . . . . .

50

1. Predictability and Prevention of Forum Shopping . . . . . . . . .

50

2. Upholding Legitimate Expectations:
“Vested Interests” and Fairness . . . . . . . . . . . . . . . . . .

53

3. Minimizing Losses and Transaction Costs, Maximizing Value . . .

57

1. Territorialism and Its Discontents

2. Universalism and Market Symmetry

C. Alternatives

. . . . . . . . . . . . . . . . . . . . . . . . . . . . .

60

1. Strengthening Universalism . . . . . . . . . . . . . . . . . . . .

60

2. Cooperative Territorialism

. . . . . . . . . . . . . . . . . . . .

62

3. Mixing Universalism and Territorialism . . . . . . . . . . . . . .

63

4. Choice of Law

. . . . . . . . . . . . . . . . . . . . . . . . . .

64

D. Modified Universalism . . . . . . . . . . . . . . . . . . . . . . . .

67

Chapter 4 Unilateral and Bilateral Forms of
National Cooperation . . . . . . . . . . . . . . . . . . . . . . . . .

71

A. Bilateral Treaties: From Medieval Origins to
Nineteenth and Twentieth Century Expansion . . . . . . . . . . . .

71

B. Anglo-American Unilateral Cooperation: Legislation and Case Law . .

75

1. United Kingdom: Common Law Cooperation and the
Limited Role of § 426 . . . . . . . . . . . . . . . . . . . . . . .

76

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2. United States: Early Resistance Gives Way to
Statutory Cooperation, § 304 . . . . . . . . . . . . . . . . . . .

77

3. Ambiguous Results on Both Sides of the Atlantic

. . . . . . . . .

81

C. Several Unilateral Regimes in Modern Europe . . . . . . . . . . . .

87

1. Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

88

2. Spain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

90

3. Belgium

. . . . . . . . . . . . . . . . . . . . . . . . . . . . .

93

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

95

5. Italy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

95

6. The Netherlands

. . . . . . . . . . . . . . . . . . . . . . . . .

96

7. Eastern European States . . . . . . . . . . . . . . . . . . . . . .

98

4. France

Chapter 5 Regional Cooperation and Regulation . . . . . . . . . . . 101
A. North America . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
1. The Draft United States–Canada Bankruptcy Treaty

. . . . . . . 102

2. The ALI “Principles of Cooperation among the
NAFTA Countries” . . . . . . . . . . . . . . . . . . . . . . . . 103
a. Preserving Value . . . . . . . . . . . . . . . . . . . . . . . . 105
b. Maximizing Value . . . . . . . . . . . . . . . . . . . . . . . 106
c. Equitably Distributing Value . . . . . . . . . . . . . . . . . . 108
B. The European Union . . . . . . . . . . . . . . . . . . . . . . . . . 109
1. Judicial Cooperation in Civil Matters

. . . . . . . . . . . . . . . 109

2. Coordinated Universality as Basic Model . . . . . . . . . . . . . 111
3. International Jurisdiction

. . . . . . . . . . . . . . . . . . . . . 113

a. Judgment Opening Main Insolvency Proceedings:
Center of Main Interests . . . . . . . . . . . . . . . . . . . . 113
b. Judgment Opening Secondary Proceedings: Establishment . . . 116
c. Other Judgments

. . . . . . . . . . . . . . . . . . . . . . . 116

(1) Judgments Deriving Directly from the Insolvency
Proceedings and Which Are Closely Linked with Them

. . 118

(2) Recognition and Enforcements of Judgments beyond the
Scope of Article 25(1) Insolvency Regulation . . . . . . . . 120
d. Treatment of Multinational Groups of Companies:
The Problem . . . . . . . . . . . . . . . . . . . . . . . . . 122
e. Treatment of Multinational Groups of Companies:
A Solution? . . . . . . . . . . . . . . . . . . . . . . . . . . 126
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4. Applicable Law . . . . . . . . . . . . . . . . . . . . . . . . . . 132
a. Conflict of Law Rules

. . . . . . . . . . . . . . . . . . . . . 132

b. Meaning of Lex Concursus . . . . . . . . . . . . . . . . . . . 134
c. Exclusions from the Lex Concursus . . . . . . . . . . . . . . . 135
(1) Opening of Insolvency Proceedings . . . . . . . . . . . . 135
(2) Shall Not Affect

. . . . . . . . . . . . . . . . . . . . . . 136

(3) State . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138
5. Recognition of Insolvency Proceedings . . . . . . . . . . . . . . 140
a. Automatic Recognition of a Judgment
Opening Insolvency Proceedings . . . . . . . . . . . . . . . 140
b. Recognition of Other Judgments . . . . . . . . . . . . . . . . 141
c. Public Policy . . . . . . . . . . . . . . . . . . . . . . . . . . 143
6. Secondary Insolvency Proceedings . . . . . . . . . . . . . . . . 143
a. Specifics of Secondary Insolvency Proceedings

. . . . . . . . 143

b. Communication and Cooperation . . . . . . . . . . . . . . . 144
7. The Position of Creditors . . . . . . . . . . . . . . . . . . . . . 148
8. Reorganization and Winding Up of Financial Institutions . . . . . 148
9. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151
C. Other Regional Arrangements

. . . . . . . . . . . . . . . . . . . . 154

1. Latin America . . . . . . . . . . . . . . . . . . . . . . . . . . . 154
2. Northern Europe . . . . . . . . . . . . . . . . . . . . . . . . . 157
3. Central Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . 159
4. Southeast Asia

. . . . . . . . . . . . . . . . . . . . . . . . . . 162

Chapter 6 Convergence through Legislation and
Professional Cooperation . . . . . . . . . . . . . . . . . . . . . . . 167
A. Harmonization through Legislation . . . . . . . . . . . . . . . . . . 167
B. Alignment by Courts and Practitioners . . . . . . . . . . . . . . . . 174
1. The Model International Insolvency Cooperation Act . . . . . . . 175
2. Governance by Private Agreement: Cross-Border
Insolvency Protocols . . . . . . . . . . . . . . . . . . . . . . . 176
a. Macfadyen

. . . . . . . . . . . . . . . . . . . . . . . . . . 176

b. Maxwell . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177
c. Olympia and York . . . . . . . . . . . . . . . . . . . . . . . 180

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d. Nakash

. . . . . . . . . . . . . . . . . . . . . . . . . . . . 181

e. Commodore . . . . . . . . . . . . . . . . . . . . . . . . . . 182
3. The Cross-Border Insolvency Concordat and Recent Protocols

. . 183

a. Everfresh and Other Early Post-Concordat Protocols . . . . . . 184
b. The Loewen Model . . . . . . . . . . . . . . . . . . . . . . 187
c. Other Protocols . . . . . . . . . . . . . . . . . . . . . . . . 188
4. Private Workouts and INSOL International’s
Statement of Principles . . . . . . . . . . . . . . . . . . . . . . 189
a. The London Approach . . . . . . . . . . . . . . . . . . . . . 190
b. INSOL International’s Statement of Principles for a
Global Approach to Multi-Creditor Workouts . . . . . . . . . 192

Chapter 7 Modeling Cross-Border Insolvency:
The Role of UNCITRAL . . . . . . . . . . . . . . . . . . . . . . . . 197
A. A Fair Framework for Effectively Addressing Cross-Border
Insolvency Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . 197
B. The Model of the Model Law
1. Limited Character

. . . . . . . . . . . . . . . . . . . . 199

. . . . . . . . . . . . . . . . . . . . . . . . 199

2. Legislative Tool . . . . . . . . . . . . . . . . . . . . . . . . . . 202
3. Practical Scope of the Model Law . . . . . . . . . . . . . . . . . 204
C. General Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . 205
1. Scope of Application . . . . . . . . . . . . . . . . . . . . . . . 205
2. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206
3. Public Policy Exception . . . . . . . . . . . . . . . . . . . . . . 207
4. Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . 207
D. Access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208
1. Unhindered Access . . . . . . . . . . . . . . . . . . . . . . . . 208
2. Procedural Standing

. . . . . . . . . . . . . . . . . . . . . . . 209

3. Position of Foreign Creditors
E.

. . . . . . . . . . . . . . . . . . . 211

Recognition of Foreign Proceedings
1. Recognition and Its Effects

. . . . . . . . . . . . . . . . . 212

. . . . . . . . . . . . . . . . . . . . 212

2. Application for Recognition . . . . . . . . . . . . . . . . . . . . 213
3. Decision to Recognize a Foreign Proceeding . . . . . . . . . . . 214

CONTENTS

ix


F.

Relief

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217

1. Purpose of Relief . . . . . . . . . . . . . . . . . . . . . . . . . 217
2. Provisional Relief . . . . . . . . . . . . . . . . . . . . . . . . . 218
3. Additional Relief

. . . . . . . . . . . . . . . . . . . . . . . . . 219

4. Protection of Interests . . . . . . . . . . . . . . . . . . . . . . . 221
G. Cross-Border Cooperation and Communication

. . . . . . . . . . . 222

1. International Practice . . . . . . . . . . . . . . . . . . . . . . . 222
2. Cooperation by Courts with Foreign Courts and
Foreign Representatives . . . . . . . . . . . . . . . . . . . . . . 223
3. Cooperation by Insolvency Office Holder with
Foreign Courts and Foreign Representatives . . . . . . . . . . . . 225
4. Means of Cooperation
H.

. . . . . . . . . . . . . . . . . . . . . . 225

Coordination of Concurrent Proceedings
1. Model of Concurrent Proceedings
2. Territorial Proceedings

. . . . . . . . . . . . . . 226

. . . . . . . . . . . . . . . . 226

. . . . . . . . . . . . . . . . . . . . . . 227

3. Coordination of Proceedings . . . . . . . . . . . . . . . . . . . 229
4. Hotchpot Rule
I.

. . . . . . . . . . . . . . . . . . . . . . . . . . 230

The Structure of the Model Law . . . . . . . . . . . . . . . . . . . 231
1. Appreciation in Legal Doctrine . . . . . . . . . . . . . . . . . . 231
2. Enacting a Model Law

J.

. . . . . . . . . . . . . . . . . . . . . . 233

Countries’ Adoption of the Model Law . . . . . . . . . . . . . . . . 235
1. Global Support . . . . . . . . . . . . . . . . . . . . . . . . . . 235
2. Country by Country . . . . . . . . . . . . . . . . . . . . . . . . 237
a. Australia . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237
b. British Virgin Islands . . . . . . . . . . . . . . . . . . . . . . 238
c. Canada

. . . . . . . . . . . . . . . . . . . . . . . . . . . . 238

d. Colombia . . . . . . . . . . . . . . . . . . . . . . . . . . . 239
e. Great Britain . . . . . . . . . . . . . . . . . . . . . . . . . . 239
f. Japan
g. Mexico

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241
. . . . . . . . . . . . . . . . . . . . . . . . . . . . 241

h. Montenegro . . . . . . . . . . . . . . . . . . . . . . . . . . 242
i. New Zealand

. . . . . . . . . . . . . . . . . . . . . . . . . 243

j. Poland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243

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k. Romania . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244
l. South Africa . . . . . . . . . . . . . . . . . . . . . . . . . . 244
m. United States

. . . . . . . . . . . . . . . . . . . . . . . . . 245

n. Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 248
K. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 249

Epilogue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 251
Appendix: List of Websites with Freely Downloadable
International Insolvency Cooperation Resources . . . . . . . . . . . 257
Table of Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 259
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 261

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Authors’ Note

Even as late as the early 1990s, none of us could have imagined just how much crossborder activity the insolvency industry would see today. While this is in large part bad
news, at least for the companies and individuals affected, this cloud has a silver lining—
we also could hardly have imagined the creativity and dedication with which practitioners, judges, and even legislators would craft gap-filling solutions to bring order to the
chaos of uncoordinated cross-border insolvency cases.
In a relatively short period of time, most of the world has transitioned from an
“every man [or country] for himself ” orientation to something closer to “all for one
and one for all” in international insolvency administration. From a series of ad hoc
arrangements among courts and administrators to carefully drafted guidelines and best
practices—and more recently to a sweeping series of regulatory and legislative interventions—the world of international insolvency has taken on a broader perspective and
grown closer and much more collaborative. Not only are practitioners and administrators communicating directly with their counterparts across the globe, but even judges
have begun to reach out to and communicate directly with their foreign colleagues,
some going so far as to hold joint hearings regarding multinational insolvencies, complete with satellite communication links. Who could have imagined? This world indeed
has grown smaller every day.
Progress can even be observed in the gradual drift of domestic insolvency rules
toward a common position, at least on several key points. In the face of still very
different national rules, though, the past decades have witnessed developments of
stunning speed and sophistication in overcoming differences and coordinating multicountry cases. These are very interesting days to be engaged with the discipline of
international insolvency as a practitioner, academic, legislator, regulator, or judge.
In light of these exhilarating developments, we were delighted when the American
College of Bankruptcy and the International Insolvency Institute invited us to undertake this project: a look back at the way in which the international insolvency community has struggled to establish closer ties over many years, a reflection on how far we
have come today in a multitude of ways, and a consideration of what further perspectives are guiding future developments to bind us into even closer cooperation. This
book is in a real sense a tribute to the efforts of the members of our two sponsoring
organizations. Most of the major developments discussed here were initiated, cultivated,
xiii


and often implemented by the industry leaders within the Institute and the College.
These two organizations have provided crucial impetus and support for the study and
refinement of both theory and practice in international insolvency, especially with
respect to advancing the movement toward greater coordination, cooperation, and
communication across national lines. We thank them for their sustaining support of our
combined quest into and fascinating study of the global international insolvency
puzzle.
Bob Wessels
Leiden
October 2008

Bruce A. Markell
Las Vegas

xiv

Jason J. Kilborn
Chicago

AUTHORS’ NOTE

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About the Authors

Bob Wessels is Professor of International Insolvency Law at the University of Leiden,
the Netherlands, an independent legal counselor and advisor, primarily in the area of
cross-border insolvency, and since 1987 Deputy Justice at the Court of Appeal, The
Hague. He has written numerous books and journal articles, including Insolventierecht
(Insolvency Law), a ten-volume series on Dutch insolvency law. He is Chairman of the
Academic Forum of INSOL Europe. With over thirty years of experience in general
commercial and corporate law, contract law, and insolvency law, Professor Wessels is
among the world’s primary experts on international insolvency law. Most recently, he
advised on such international insolvency cases as Royal Aircraft Fokker, United PanEurope Communications (UPC), Yukos Oil, BenQ Mobile, OOO Promnefstroy and the
Dutch branch of Iceland’s Landsbanki. Professor Wessels has been a visiting professor
in New York (St. John’s University School of Law), Frankfurt, Pretoria (South Africa)
and Riga (Latvia) and also acted as Special Technical Consultant to the IMF, the World
Bank and the European Commission (TAIEX) advising in Jakarta (Indonesia), Tblisi
(Georgia) and Tallinn (Estonia) on implementing new insolvency laws.
Bruce A. Markell is a United States Bankruptcy Judge for the District of Nevada.
Before taking the bench, he practiced bankruptcy and business law for ten years and
was a law professor for fourteen; he maintains his academic connections as the Senior
Fellow in Bankruptcy and Commercial Law at the William S. Boyd School of Law at
the University of Nevada Las Vegas. He is the author of numerous articles on bankruptcy and commercial law, and a co-author of four law school casebooks, one of
which will soon be translated into Japanese. He contributes to Collier on Bankruptcy,
and is a member of its editorial advisory board. He is a conferee of the National
Bankruptcy Conference, a fellow of the American College of Bankruptcy, a member of
the International Insolvency Institute, and a member of the American Law Institute.
Since 2007, he has been one of six judges of the Bankruptcy Appellate Panel for the
United States Court of Appeals for the Ninth Circuit. He has also been an adviser to the
United Nations on secured transactions and to the Republic of Indonesia on bankruptcy reform. He was the International Bar Association’s representative to the meetings that resulted in the 2001 approval of the United Nations Convention on the
Assignment of Receivables in International Trade.
xv


Jason J. Kilborn teaches business and commercial law (including bankruptcy) at John
Marshall Law School in Chicago. Before joining the academy, he spent two years in
practice as an associate at two major law firms in New York and Washington, D.C.,
focusing on bankruptcy litigation and corporate reorganization. Professor Kilborn has
developed a specialization in the comparative analysis of legal regimes for combating
consumer financial distress. He has written several pioneering articles and a book
examining the emergent consumer insolvency systems in Germany, France, Belgium,
Luxembourg, the Netherlands, Austria, and Sweden, and he has presented papers
on comparative consumer bankruptcy law and policy at several national and international conferences. Two of Professor Kilborn’s articles have been translated into
Spanish and Portuguese in connection with law reform efforts in South America, he
recently published a solicited article in the Italian business newspaper Il Sole 24 Ore
on consumer debt and insolvency reform in Italy, and he has been invited to consult
with the Hungarian Ministry of Justice on the development of a new consumer
insolvency law.

xvi

ABOUT THE AUTHORS

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Chapter 1

General Introduction

A. INSOLVENCY AND BANKRUPTCY
When describing the historic development of the U.S. Bankruptcy Code, Charles
Warren called bankruptcy a gloomy and depressing subject. To this he added that bankruptcy law was a dry and discouraging topic.1 Discouraging, maybe, but gloomy,
depressing, or dry? Perhaps in the eyes of the general public when people are thinking
about the law, the legal profession, and the legal system in which bankruptcy legislation plays its role. However, when assessing what bankruptcy or insolvency law2
generally reflects, the informed observer must conclude that such laws function as
the heartbeat of a nation’s economy. There is a tremendous need for comprehensive
insolvency law to achieve such goals as protection of consumers against the consequences of overindebtedness in today’s credit society. As far as businesses are concerned, insolvency law is essential for the support of modern economic processes based
on competition, as inefficient businesses must be given a way to change structurally,
rehabilitate themselves, or exit in an orderly way from the market. When insolvency
law includes rules that foster discipline and honesty in financial management, it also
protects creditors as such legislation increases their chances of at least a percentage of
their claims will be paid.
While a nation may equally recognize these goals in its legislation, some parts
seem to contradict each other. Nevertheless, insolvency law is a vivid and important
part of the legal framework of both market economies and economies in transition.
A transparent and solid insolvency system gives both local and foreign investors confidence in the rules governing economic development, including those that generally

1
2

CHARLES WARREN, BANKRUPTCY IN UNITED STATES HISTORY 3 (1935, reprinted by Beard Books,
1999).
The terms insolvency and bankruptcy are used interchangeably. In the United States, the word
bankruptcy is used for both individuals and businesses, but in England the two words are
used to differentiate between the broad categories of debtors: individuals (bankruptcy) and
businesses (insolvency).
1


safeguard investments.3 Insolvency law ultimately is the litmus test for a well-functioning
civil and company law system, and even more broadly, for the entire economic structure
of a country.4 Accordingly, in most of the more developed legal systems, insolvency
law has grown in importance, although—as we will see—most countries continue to
struggle with finding the most desirable approach.
Insolvency law can be described as the prevention, regulation, or supervision of
discontinuity in the legal relations of a person (legal entity) that is in financial difficulties,
including the discontinuity of that person itself. In companies and businesses, this
means logically the continuity of the business in its core meaning: (i) the possibility of
continuing employment of the workers, (ii) the possibility of efficiently employing all
available means (natural resources, technical equipment, etc.), and (iii) the possibility
of continuing all other relations, such as with small suppliers of goods and buyers/
customers of products and services. If financial difficulties increase, insolvency laws
become the rules for the legal battle. They form a melting pot of family law, company
law, contract law, securities law, employment law, and of course insolvency procedural
law itself by which the outcome will be determined.5
International insolvency law has existed for hundreds of years. One of the earliest
examples of international insolvency by “decree” concerns the Ammanati Bank of
Pistoia in Italy, which became insolvent in 1302. The bank, with its seat in the Republic
of Pistoia, had branches all over Europe, and hence its assets were widely spread. Its
sudden closure of the Rome branch caused a panic among its creditors, including the
Holy See and members of the Papal Court who had been important clients. When local
assets were removed from Rome to Pistoia, the creditors in Rome sought intervention
from Pope Boniface VIII.
In the interest of the Curia, the pope took an active part in the solution. The owners
of the bank were forbidden to dispose of any property, and the bank’s debtors were
allowed to make payments from their accounts only with the authorization of the Holy
See. This was all in conformity at that time with the applicable bankruptcy statutes, but
proved to be inadequate for dealing with the situation beyond Italy’s borders, as the
principal debtors located in Spain, England, Portugal, Germany, and France were
unwilling to pay. Local creditors tried to appropriate local assets of the bank’s branches.
The pope offered the owners of the bank, who had fled outside Rome, safe conduct if
3
4

5

2

Compare Régis Blazy, Bertrand Chopard & Agnès Fimayer, Bankruptcy Law: A Mechnism of
Governance for Financially Distressed Firms, 25 EUROPEAN J. LAW & ECON. 253 (2008).
For an example, see Eugene Clark & Sutee Supanit, Thai Insolvency Law: One Step Towards
the Development of the Legal Infrastructure for a Revitalised Economy, in INSOLVENCY LAW IN
EAST ASIA 291 (Roman Tomasic ed., 2006).
L.F. Ganshof, Le droit de la faillite dans les Etats de la Communauté économique européenne,
Centre interuniversitaire de droit compare, Bruxelles (1969) (“Because it is true that insolvency not only results in a collective attachment, it is also true that insolvency is one of the
melting pots in which all legal affairs amalgamate. Insolvency law specialists must know everything: the law of persons, the law of property, obligations, contracts, mortgages and privileges, commercial law, procedural law, employment law, administrative law, without forgetting,
just as well, insolvency law!”); see also P. Didier, Problématique du droit de la faillite internationale, 3 REVUE DE DROIT DES AFFAIRES INTERNATIONALES 203 (1989) (“[I]nsolvency law is a
crossroads in which all components of the legal system meet and cross”).
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they returned to Rome and actively engaged in collecting debts from abroad. Although
a local act of an ordinary trustee would have failed, the effect of the pope’s letters
(letters rogatory) transcended State borders and led to the collection of a major part of
the bank’s foreign assets for distribution among all creditors.6
As the story of the Ammanati Bank illustrates, cross-border insolvencies create
special challenges. To fully appreciate the challenges of international insolvency, we
must understand the historical development of national policy with respect to financial
distress as well as the current contrasts among different modern laws and legal cultures. The remaining sections of this chapter, as well as Chapter 2, will explore the
patchwork of perspectives on insolvency in the ancient and modern world. Subsequent
chapters will turn to the specifics of international insolvency, beginning in Chapter 3
with its key theories and continuing in later chapters with early attempts at and
modern developments in international cooperation and communication in cross-border
insolvencies.

B. ROMAN TIMES
Bankruptcy is a concept for all times. In the early Roman agrarian society in which
credit was the exception, Table 3 of the Twelve Tables (around 450 BC) provides that if
a debt for which a judgment was given remained unpaid for thirty days, the debtor
could be taken captive by his creditor (obligari means to chain). If the debt remained
unpaid for a further sixty days, the creditor was entitled to either put the debtor to death
(partis secanto means cut into pieces) or to sell him into slavery across the Tiber river.7
In the latter instance, the ownership of the debtor’s estate, including parental authority
over his family and his slaves, was transferred to his creditor(s). The cause of the
inability to pay was irrelevant.
Such an approach was used not only in early Roman society, but also by the Greeks,
Gauls, and Germans. The latter group applied the principle that if there were multiple
creditors, the first creditor who was not satisfied on his claim was allowed to carry

6

See Kurt H. Nadelmann, Bankruptcy Treaties, 93 PENN. L. REV. 58 (1944); see also in CONFLICT
LAWS: INTERNATIONAL AND INTERSTATE, SELECTED ESSAYS, 299 (1972). See in more detail
A. Fliniaux, La faillite des Ammanati de Pistoie et le Saint-Siège (debut du XIVe siècle), in
NOUVELLE REVUE HISTORIQUE DE DROIT FRANÇAIS ET ÉTRANGER 436 (1924); Hans Hanisch,
Bemerkungen zur Geschichte des internationale Insolvenzrechts, in FESTSCHRIFT FÜR FRANZ
MERZ 159 (1992); David Graham, The Insolvent Italian Banks of Medieval London,
9 INTERNATIONAL INSOLVENCY REV. 213 (2000). The Compagnia dei Bardi, a banking and
trading company established by the Bardi family in Florence, went bankrupt in 1344, mainly
because of King Edward III’s repudiation of war loans. To learn more regarding this insolvent
bank and its overseas branches, see P. Didier, La probèmatique du droit de la faillite internationale, REVUE DE DROIT DES AFFAIRES INTERNATIONALES 201 (1989). See in general P. Santella,
Le droit des faillites d’un point de vue historique, FAILLITE ET CONCORDAT JUDICIARE: UN DROIT
AUX CONTOURS INCERTAINS ET AUX INTERFERENCES MULTIPLES 217 (2002).
See W.W. BUCKLAND, A TEXTBOOK OF ROMAN LAW 618 (3d ed. 1963).
OF

7

GENERAL INTRODUCTION

3


away the debtor. A rough first version of a rule of execution emerges: he who comes
first, grabs first.8
In Roman society, being bankrupt also meant that the debtor was rendered infamis,
which included being banned from certain political or judicial functions unless he
voluntarily surrendered his property to his creditors.9 Only later was emphasis placed
on the confidence a debtor created and the trust of the creditor in the debtor (credere
means trust).
In the first century BCE, when a debtor did not pay, the praetor had the power to
order execution: missio in bona.10 This is a first sign of the development of a certain
form of proceedings in insolvency-related matters.11 Pursuant to the missio in bona, the
debtor’s full estate was seized by the creditor, who then possessed an executory title.
The estate was sold by the magister bonorum, a creditor chosen by all creditors, to the
highest bidder, the bonorum emptor. The latter succeeded in law under general title. He
did not pay a fixed amount, but by accepting the position promised to pay a certain
amount.12
The Lex Julia of Emperor Augustus enabled certain debtors to surrender their estates
(cessio bonorum). After the estate was sold, creditors were able to satisfy their claims,
and the captured debtor regained his freedom. The cession bonorum was not a power,
but a favor for those who became financially down and out from other than acting in
bad faith.13 Cessio bonorum did not allow the creditors to acquire ownership of the
goods of the debtor; instead, their recourse was against the proceeds of the sale.
During the Justinian period payment of a claim by transfering title of ownership
(datio in solutionem) was recognized.14 In this period, a sole heir of an insolvent estate
was able to receive partial remission when the majority of the creditors approved
(remissio).15 The law of succession (inheritance) bears a first seed in several forms of
composition. The notion of a majority-approved workout thus made its way into Roman
law following a path from the law of succession.

8
9
10

11

12
13
14
15

4

J.C. VAN OVEN, LEERBOEK VAN ROMEINS PRIVAATRECHT 188 (1948) uses the word grijprecht (grab
right) of the creditor.
Harry Rajak, The Culture of Bankruptcy, in INTERNATIONAL INSOLVENCY LAW: THEMES AND
PERSPECTIVES 3, 10 (Paul J. Omar ed., 2008).
VAN OVEN, supra note 8, at 190; Melanie Roestoff, ’N Kritiese Evaluasie van Skuldverligtingsmaatreëls vir Individue in die Suid-Afrikaanse Insolvensiereg 19 (doctoral thesis, University of
Pretoria, 2002); A.J. Noordam, Schuldsanering en goede trouw 130 (doctoral thesis, Vrije
University Amsterdam, 2007) (mentioning other sources).
K. Neumeier, Historische und dogmatisch Darstellung des strafbaren Bankerotts unter
besonders eingehender Untersuchung der Schuldfrage, München (1891), p. 1ff, and Jan H.
Dalhuisen, Compositions in Bankruptcy, a Comparative Study of the Laws of the E.E.C.
Countries, England and the U.S.A. 6 (doctoral thesis, University of Leiden, 1968).
J.H.A. Lokin, Prota. Vermogensrechtelijke leerstukken aan de hand van Romeinsrechtelijke
teksten uitgelegd, Groningen (1989), p. 78 et seq.
VAN OVEN, supra note 8, at 190 et seq.
Roestoff, supra note 10, at 35.
Dalhuisen, supra note 11, at 9.
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In late classical times, during the fifth century Justinian period, execution on the
person himself was prohibited.16 However, a judgment containing an order for the debtor
to pay could include an order to work for the benefit of the creditor until the debts were
satisfied. Yet the general rule in these days was execution on assets along with refinement
of certain forms of seizure.
In this later period, at the request of the debtor, the emperor could also provide for
postponement of payments. This permitted the debtor to answer the request for payment
of a claim with an exceptio moratoria (moratorium defense). The city of Constantine
introduced this possibility in 325, but later during that century a debtor granted postponement had to set a proper bail. Postponement was granted if creditors holding half
of the claims approved. The postponement lasted for five years, and also had legal effect
with respect to third parties.17 It is generally believed that fraudulent debtors could not
use this vehicle, just as it was impossible for them to use cessio bonorum.18

C. MIDDLE AGES
In the early Middle Ages in several Italian mercantile centres (Genua, Florence, and
Venice), execution of assets for the benefit of creditors was commonplace. Severe
legislation was in place to sanction the nonpaying debtor as it was generally believed
he had acted deceitfully or with a fraudulent intention towards his creditors who had
granted him credit and given him their trust. The word credit is derived from the Latin
credere, which as previously indicated means to put one’s trust in someone. The present
Italian term fallimento can be traced back to fallere, to defraud, which also is reflected
in other Western-European languages.19 In the early days, the Italian proverb Fallitus,
ergo fraudator20 meant bankrupt, therefore the debtor was a fraudster (crook).
To assess the estate of the so-called fraudulent debtor, it was permissible to put him
on the rack. Title to the estate was transferred to the creditors. Under the supervision
of a judge, the dividends were distributed equally. Forced compositions approved by
a majority of creditors binding the minority emerged as another possibility.21
It is understandable that a debtor facing possible torture and loss of all his belongings
would take as much as he could carry and flee. In Holland, sources of law from the
sixteenth century often refer to the debtor on the run ( fugitive).

16

17
18
19
20
21

In the words of Plautus: Pecuniae creditae bona debitoris, non corpus obnoxium esset (that the
goods of the debtor, not his body is liable (guilty) for his debts). See Roestoff, supra note 10, at
28 (also mentioning other sources).
S.P. Lipman, Essai historique sur les surséances 6 (doctoral thesis, University of Amsterdam,
1827).
Dalhuisen, supra note 11, at 10; Roestoff, supra note 10, at 40.
Belgium and Luxembourg: faillite; Netherlands and Belgium: faillissement; Malta: falliment.
Probably Portugal: falência.
M.E. Kronenberg, Iets over enkele bankbreuk 4 (doctoral thesis, University of Leiden, 1879).
See Noordam, supra note 10, at 139, refering to A.C. Holtius, Het Nederlandsche
faillitenregt, Utrecht: Van der Post Jr. 1878, p. 6.

GENERAL INTRODUCTION

5


In these days legislation is a mix (in present terms) of civil law and criminal law. The
word bankruptcy melds the terms bancus (a wooden or stone bench or table) and ruptus
(broken). Historically, the term can be interpreted quite literally. A bench or table was
used by the first banks during a market to pay tolls or write a bill of exchange. Another
version is that the “bank” symbolizes an abacus, engraved on the table and used by
a merchant. If the table was broken, the merchant was not able to calculate the prices
for his merchandise. When the user of the table failed, his bank had to be broken to
communicate to the public that the person to whom the bank belonged was no longer
in a condition to continue his business.
The term banco rotto (sometimes: banca rotta) was used quite widely in Italy
and found its way to France, especially in Lyon, where many Italian merchants
were active. Later it filtered into other languages: United Kingdom, Ireland, and
.
United States (bankruptcy), Latvia (Bankrots), Lithuania (i˛mone s bankroto byla), and
the Netherlands, where the word bankbreuk (comparable to the English “fraudulent
bankruptcy”) is used.
The sanctioning of fraudulent debtors gained importance by using rules of general
civil law especially as related to the division of the assets. The first English bankruptcy
statute provided for monetary penalties,22 and later English enactments made the
commission of certain bankruptcy crimes punishable by death.23 As Rajak said, debtors
“were, in short, criminals—a perception which was to persist until relatively recent
times.”24
Based on the Roman example of exceptio moratoria several countries introduced a
similar regulation, sometimes with the approval of creditors, sometimes as a favor
granted by the government. A variety of words are used to describe the legal measure;
in France, they were the défenses générales (general defenses) and the so-called lettres
de répit (letters of postponement) as foreseen in Title IX of the Ordonnance 1673. The
letters of postponement were issued by the king, and execution against the debtor was
not allowed. The postponement period granted could be lengthened with the consent of
three-quarters of the creditors. In the Netherlands these letters (Brieven van Uytstel)
were also used, though according to Grotius (Hugo de Groot) approval was required of
the majority of the creditors representing a majority of the volume of the debt. It is notable the court used recommendation and instruction (aenrading ende onderrichtinge) to
persuade creditors to agree to the debtor’s proposal.25

22

23

24
25

6

34 & 35 Hen. 8, ch. 4 (1543). This act required the debtor to pay a penalty equal to twice the value
of any property concealed, 34 & 35 Hen. 8, ch. 4, § 2 (1543), and penalized any who assisted the
debtor by a similar fine. 34 & 35 Hen. 8, ch. 4, § 3 (1543). Debtors who fled overseas could be
declared outlaws “out of the King’s protection.” 34 & 35 Hen. 8, ch. 4, § 5 (1543).
4 WILLIAM BLACKSTONE, COMMENTARIES *156 (“I shall . . . mention over again some abuses
incident to bankruptcy, viz., the bankrupt’s neglect of surrendering himself to his creditors; his
non-conformity to the directions of the several statutes; his concealing or imbezzling [sic]
his effects to the value of 20£; and his withholding any books or writings with intent to defraud
his creditors: all which the policy of our commercial country has made capital in the offender;
or, felony without benefit of clergy.”).
Rajak, supra note 9, at 12.
H. de Groot, Inleidinge tot de Hollandse Rechtsgeleerdheid (2d ed., 1965).
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D. COMMERCIAL CODE OF NAPOLEON AND THE RISE OF
GENERAL BANKRUPTCY LAW
Until this point in time, in several Western-European regions insolvency-related rules
were applied as a reception of Roman law, mixed with communal law and sometimes laid
down in town charters (town ordinances). Debtors were threatened with severe sanctions. In Western Europe, the first central general regulation was the Ordonnance de
Louis XIV pour le commerce of 1673.26 Although not all subjects were covered,
Title XI dealt with Des Faillites et Banqueroutes (On Debtors and Bankruptcy), Title
IX with Des Défenses et Lettres de Répit (Defences and postponement of payment),
and Title X with Des Cessions de Biens.27 Title XI contained a binding composition
for which a division was made between general (pari passu) creditors and preferred
creditors.
In Napoleonic times, a general codification was laid down in the Code de Commerce
(Commercial Code) of 1807, Book III: Des faillites et banqueroutes. Although the
law applied only to merchants,28 it became a model for legislation in a number of
countries.
In larger parts of Europe, regulation had a strong criminal character.29 The Antwerp
ordinances date from 1516, 1570, 1582, and 1608. The Compilatae of 1608 drew a
distinction between bankrupt debtors or debtors on the run ( fugitiven) and “only broken
or insolvent persons.” Legal consequences depended on whether the insolvency was
public knowledge.30 Several Dutch cities including Amsterdam and Dordrecht established Chambers of Desolated Estates.31 Instructions or ordinances for these chambers
contained rules regarding insolvency, which included the Roman law type of cessio
bonorum that Dutch painter Rembrandt applied for in 1656.32 Dutch legislation regarding insolvency is a mix of the Amsterdam Ordinance, elements of Roman law, and
local law. However, from 1801–31 the French Code de Commerce was applicable in the
Netherlands.
In sixteenth and seventeenth century England, bankruptcy rules had everything to
do with “seizure, penalty and coercion. The commission of an act of bankruptcy was
treated as a crime and the bankrupt was a criminal.”33 However, creditor control of the
26
27
28
29

30
31
32
33

The Decree of Louis XIV for commerce.
J. PERCEROU, DES FAILLITES ET BANQUEROUTES ET DES LIQUIDATIONS JUDICIARIES 19 (2d ed. 1938).
Text of Article 1: Tout commerçant qui cesse ses paiements, est en état de faillite (Every merchant who stops his payments is in a state of insolvency).
In the Lowlands (present Netherlands and part of Belgium), severe sanctions are found in the
Proclamations of Charles V “regarding police” of 1531 and 1540, in which the Proclamation of
1544 prohibited binding compositions.
J.P.A. Coopmans, De jaarmarkten in Antwerpen en Bergen op Zoom als centra van rechtsverkeer en rechtsvorming, in HANDELSRECHT TUSSEN ‘KOOPHANDEL’ EN NIEUW BW 1–24 (1988).
G. Moll, De desolate boedelskamer te Amsterdam; Bijdrage tot de kennis van het Oud-Hollands
Failliten-recht (doctoral thesis, University of Amsterdam, 1879).
PAUL CRENSHAW, REMBRANDT’S BANKRUPTCY. THE ARTIST, HIS PATRONS, AND THE ART MARKET IN
SEVENTEENTH-CENTURY NETHERLANDS (2006).
David Graham, A Dark and Neglected Subject: Landmarks in the Reform of English Insolvency
Law, 11 INTERNATIONAL INSOLVENCY REV. 97, 97 (2002).

GENERAL INTRODUCTION

7


assets of the debtor was reduced by the Act of 1831, which created the function of what
now is the Official Receiver. Until 1861 bankruptcy rules related only to merchants.
Imprisonment of a debtor was limited by the Debtors Act of 1869, while in 1883, the
Bankruptcy Act emerged, the predecessor of the Bankruptcy Act of 1914 and the
Insolvency Act of 1986.34
In the United States, a major theme was “the transformation of bankruptcy from one
of moral failure to one of economic failure.”35 In the early days of the republic, imprisonment for debt was commonplace.36 However, in the late 1700s, several of the states
experimented with limited-effect bankruptcy rules, offering freedom from imprisonment to those debtors who agreed to cede their nonexempt property to creditors and
take a “poor debtor’s oath.” In the mid-1800s, the debates surrounding slavery, imprisonment for debt, and bankruptcy swirled together, ultimately leading to the widespread
abolition of imprisonment for debt and the development of a federal bankruptcy law.37
Although at first they were short-lived, these laws finally found solid, permanent
ground in the Bankruptcy Act of 1898, which placed a firm focus on rehabilitation of
the financially failed and reinvigoration of economic energies. These policies, along
with a procedure paralleling the state law “equity receivership” for rescuing large distressed corporations, was reaffirmed and largely recodified in 1978 with the adoption
of the Bankruptcy Code and its famous Chapter 11.38
Throughout the times postponement of payment as an insolvency measure also has
served certain interests of the society at large. A postponement of payment can be
characterized as a specific moratorium (mora means delay). Since Roman times, in
parts of Europe a general moratorium has been used on occasion to protect larger
groups of debtors. These moratoriums are issued by force of law with the goal of protecting a group of debtors by allowing them to use a moratorium defense against their
creditors or by postponing temporarily the right of groups of creditors to execute on
their claims. For example, in 555, Emperor Justinian granted a moratorium as to all
citizens of Italy and Sicilia. In France in 1870, a moratorium regarding bills of exchange
was also put in place. In the Netherlands such moratoria were introduced in legislation
that protected debtors from the consequences of specific circumstances such as in
1914 and 1940 (the beginnings of the two world wars) and in 1953 in the province of
Zeeland relating to the severe flooding that took place there.

34
35
36
37

38

8

Rajak, supra note 7, at 14.
Id. at 15.
WARREN, supra note 1, at 13
See generally BRUCE H. MANN, REPUBLIC OF DEBTORS: BANKRUPTCY IN THE AGE OF AMERICAN
INDEPENDENCE (2002); PETER J COLEMAN, DEBTORS AND CREDITORS IN AMERICA: INSOLVENCY,
IMPRISONMENT FOR DEBT, AND BANKRUPTCY, 1607–1900 (1974); Jay Cohen, The History of
Imprisonment for Debt and its Relation to the Development of Discharge in Bankruptcy, 3
J. LEGAL HIST. 153 (1982).
See generally DAVID A. SKEEL, DEBT’S DOMINION. A HISTORY OF BANKRUPTCY LAW IN AMERICA
(2001).

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