FREE MOVEMENT OF BANKRUPTCY JUDGMENTS ACROSS BORDERS

Wenliang Zhang
Ghent University, Belgium

Dalia Perkumienė
Kaunas University of Applied Sciences, Lithuania

Introduction

As to the present day trade and commerce, there is a rather prominent characteristic, to wit: it becomes more and more intensely foreign elements-related. Globalization has awarded the corporations far more opportunities than ever before. Meanwhile, amounts of risks closely follow the process. Among these risks is the risk of collecting debts abroad. In the case of debtors' bankruptcy, the creditors’ risk of collecting debts becomes real and urgent. On the one hand, it is not a rare thing for a corporation to go bankrupt. For example, it was recently reported that Saab Automobile filed for liquidation on Dec. 19th, 2011 and Eastman Kodak Company also applied for bankruptcy. Similar instances occur from time to time. On the other hand, it is impossible for a corporation to predict with one hundred percent accuracy before each transaction whether its trading partners will go bankrupt vel non. It is equally true that a corporation cannot tell whether it will go bankrupt. Anyway, due attention is required in the course of international transactions. Above all, a wise corporation should bear in mind what procedure to follow when bankruptcy of a debtor has occurred or will potentially occur. The international community has endeavoured to create a favourable environment for the creditors in the event of bankruptcy, such as existence of international conventions in this regard and wide acceptance of universalism as opposed to territorialism in terms of the effects of bankruptcy proceedings present a good illustration. As the most important embodiment of a bankruptcy proceeding, a favourable bankruptcy judgment may be obtained in a country, but at this moment the journey to collecting debts is only half-covered since a bankruptcy judgment concerning foreign elements normally entails recognition abroad. The harmonisation of the treatment of international insolvencies results from a practical need: the lack of uniform rules brings about numerous harmful effects; the existence of borders and the dispersion of a debtor's assets outside the jurisdiction of the court where insolvency is filed renders, company rescue risky (Hameau 2003).The present article is set out to investigate the current scenario and the most important aspects regarding circulation of bankruptcy judgments across borders by means of analyzing from a global perspective and comparing the most important mechanisms regarding circulation of bankruptcy judgments.

1. Basic issues concerning the recognition of bankruptcy judgments

The term ‘bankruptcy’ is slightly different from the term ‘insolvency’ and refers to ‘a statutory procedure by which a (usu. insolvent) debtor obtains financial relief and undergoes a judicially supervised reorganization or liquidation of the debtor's assets for the benefit of creditors’ (Garner 2009; Rajak 2010). When a corporation goes bankrupt, it is more often for the courts to intervene to fairly deal with its debts by way of commencing a bankruptcy proceeding and delivering a judgment against all the creditors; in fact, the vast majority of bankruptcy cases are liquidation cases.Throughout the article, the bankruptcy will be discussed only in the sense of liquidation of corporations. The natural persons’ bankruptcy sways beyond the scope of discussion here. Historically, a bankruptcy judgment only brings the impacts or effects within the territory where it is renderedor most countries merely ignore other countries handling the foreign-elements related bankruptcy. Things change significantly as the integration of countries pressures to agree on the principle of universalism.

(I) Basis for the recognition of bankruptcy judgments

Bankruptcy judgments constitute one specific category of the civil and commercial judgments; so, the basic theories justifying the recognition and enforcement of the civil and commercial judgments (hereinafter “the JRE”) also shed some light in the case of bankruptcy judgments. As regards the justifications in respect of the JRE, various theories have been proposed in the past several centuries. The classical theories in this respect mainly include, but are not  limited to the principle of comity, the doctrine of vested rights and the theory of obligations (Fawcett et al. 2008; Lowenfeld 2002; Collier 2001). These theories provide for strong justifications for recognizing and enforcing the civil and commercial judgments including the bankruptcy judgments. As the principle of comity proposes, there is a need for showing courtesy among amicable allies, which calls for one country to grant recognition in order to express courtesy; and in a society attaching more and more attention to individual’s rights and obligations, justifications for the JRE can be traced to considerations of stress on the protection of the creditors’ rights and pursuit of legal certainty in resolving civil disputes.The theoretical values of these theories remain, but their practical values get dwarfed as no single country is willing to publicly declare that it won’t recognize foreign judgments. Instead, the JRE becomes increasingly commonplace. From the perspective of either individual countries, or a region or the whole world, the efforts to smooth and advance the cooperation in the field of the JRE have been constantly intensifying and deepening. So far as the recognition and enforcement of bankruptcy judgments is concerned, it has not kept pace with this process since a number of international or regional instruments concerning the JRE explicitly exclude judicial cooperation on the recognition of bankruptcy judgments. In this respect, Art. 1(2)(b) of the 2001 Brussels I Regulation and Art. 1(2)(b) of the 2007 New Lugano Convention are perfect examples; recognition of bankruptcy judgments are not covered thereunder. A bankruptcy judgment addresses the final distribution of the assets of the insolvent among its creditors; it concerns the fate of the insolvent, as well as the fairness and equality among the various creditors. In some instances, a bankruptcy proceeding may even threaten the country’s economic stability. Therefore, the countries are really meticulous in exercising the adjudicatory authority to deliver bankruptcy judgments and they are also vigilant in treating foreign bankruptcy judgments.This is why the recognition and enforcement of bankruptcy judgments will normally encounter much more difficulties than the recognition of other kinds of civil and commercial judgments. It is also noteworthy that there are some countries that don’t differentiate the JRE and the recognition of the foreign bankruptcy judgments, such as Egypt (Zamzam 2010).

The first preliminary question revolving around the recognition and enforcement of a foreign bankruptcy judgment is why it entails the recognition or enforcement abroad. In this regard, the above mentioned classical theories have already shed light thereon. Besides those classical theories, a need of further cooperation for maximizing interests of all related participants in a bankruptcy proceeding is of great concern. Not only the governments, but also the creditors, debtors, third parties and even the general public are actually all involved in a bankruptcy. Balance of interests is of great significance in treating a bankruptcy judgment. So far as the creditors are concerned, the recognition and enforcement of a bankruptcy judgment is to satisfy its credits to the furthest extent.

(II) Conditions and defenses in recognizing bankruptcy judgments

The JRE must be based on satisfaction of some preconditions and non-existence of possible defenses, which is equally true of the recognition of bankruptcy judgments. These preconditions and defenses differ from each other among countries and international instruments. This part is aimed to sketch out the commonly prescribed conditions and defenses. In general, the ripeness of bankruptcy judgments and international jurisdiction are universally and indispensably required. The principle of ripeness implies that foreign bankruptcy judgments must be final and conclusive for the recognition purposes, and for most occasions the law of the adjudicating country will determine if bankruptcy judgments become ripe. The latter condition signifies that the original country must have jurisdiction to deliver bankruptcy judgments, and this condition is of paramount significance in the sense that it is regarded as an aspect overshadowing other aspects concerning the recognition of bankruptcy judgments. The available national laws or international conventions in this respect almost unanimously stipulate the precondition as the first and foremost precondition. Besides the two commonly prescribed preconditions, the principle of reciprocity is sometimes imposed. The reciprocal requirement mandates that recognition of bankruptcy judgments be conditioned on the fact that the adjudicating country also recognize bankruptcy judgments from the recognizing country. As a matter of course, fulfillment of the preconditions will lead to the grant of recognition unless defenses are offered. In respect of the defenses to the JRE, the most popular ones are comprised of the public policy exception, breach of natural justice and conflicting proceedings or judgments (Collier 2001; Briggs 2002).The general trend is that the defenses should be restrictively interpreted and have recourse to; and it is normally up to the judgment debtors to establish if these defenses are tenable and the voluntary intervention of the requested courts is only an exception. A quite important aspect concerning the recognition of bankruptcy judgments for creditors is that provisional steps including protective measures such as interim reliefs should be available to and also are also well known of by the creditors (Smart 1998) These measures can normally be found in the relevant laws in this respect.

2. The domestic and international laws on recognition of bankruptcy judgments

The judicial cooperation regarding bankruptcy proceedings has drawn a good deal of attention from the international community: individual countries enact domestic laws to cater for such a need; regional organizations seek to promote the depth and efficiency in such a cooperation; and international organizations also dedicate themselves to establish a structure for smooth cooperation in this regard. These three levels of efforts actually complement each other and advance side by side for achieving the goal of access to justice by way of strengthening mutual trust among countries in favor of circulation of bankruptcy judgments.

The United Nations Commission on International Trade Law (hereinafter “the UNCITRAL”) has done a remarkable and praiseworthy job in terms of promoting judicial cooperation on bankruptcy. To date, the most representative fruit reaped by the UNCITRAL in this respect is the 1997 UNCITRAL Model Law on Cross-Border Insolvency as well as a series of guides thereof forconsolidating and advancing the Model Law, which include the 2004 Legislative Guide on Insolvency Law, the 2009 UNCITRAL Practice Guide on Cross-Border Insolvency Cooperation, the 2010 UNCITRAL Legislative Guide on Insolvency Law, Part three: Treatment of enterprise groups in insolvency and the 2011 The UNCITRAL Model Law on Cross Border Insolvency: the judicial perspective.Following the 1997 UNCITRAL Model Law, a number of countries have enacted their insolvency laws based on the UNCITRAL Model Law on Cross-Border Insolvency. As of today, 18 countries including Austria, Canada, Greece, Japan, the U. K. and the U. S. have brought in legislation based on the UNCITRAL Model Law.The 1997 UNCITRAL Model Law, as well as these Guides all touch upon the issue of the recognition of the foreign bankruptcy proceedings (or judgments) and unanimously point to the aim of facilitating this process. Regional efforts are also quite prominent in this regard, which can be sufficiently demonstrated by the Insolvency Regulation of the EU.The arrival of the Insolvency Regulation is accompanied by a number of rationales that include: ‘The proper functioning of the internal market requires that cross-border insolvency proceedings should operate efficiently and effectively.’ The Insolvency Regulation governs various important issues regarding the collective insolvency and closes a gap due to destitution of the rules on the bankruptcy issues underneath the 1968 Brussels Convention, as well as the superseding 2001 Brussels I Regulation regarding the JRE. Importantly, the Insolvency Regulation acts as a supranational law directly applicable among the EU member states; the recognition of bankruptcy judgments is among the most key issues regulated by the Regulation. An automatic recognition of a judgment opening insolvency proceedings is introduced, and this is largely due to the unification of the international jurisdiction concerning the opening of insolvency proceedings. But a clear-cut distinction is made between the main insolvency proceeding and the secondary insolvency proceedings; the former proceeding predominates in the winding up of the debtor’s assets and the liquidator or representative in the main insolvency proceeding is awarded wide and predominating powers as opposed to the secondary insolvency proceeding. It is noteworthy that some conditions and defenses are laid down with regard to the recognition of bankruptcy judgments, and the public policy exception remains a prominent position.Nevertheless, tough restrictions are imposed in having recourse to these conditions and defenses, and bankruptcy judgments enjoy almost a totally free circulation among the member states. Above all, protective measures including the provisional measures can be applied for before both the original country and the requested country. In summary, the Insolvency Regulation founds a structure greatly guaranteeing the free movement of the bankruptcy judgments among the EU member states, and a generally felt assessment is that the EU Insolvency Regulation works quite well (Wessels 2009), although makeovers have been voiced out by some experts (Wessels 2006) and strong criticisms are also offered by some scholars (Wessels 2009). Regional cooperation in terms of bankruptcy proceedings can also be traced in other regions, such as the Montevideo Treaty on International Commercial Law of March 12, 1889 in Latin America, the Nordic Bankruptcy Convention 1933 in Northern Europe, the OHADA Treaty 1993 in central Africa and the Seoul Statement on Mutual Judicial Assistance 1999 in Southeast Asia(Wessels 2009). Among these regional instruments, the recognition of bankruptcy judgments occupies a striking position. Besides the efforts that have been made in the context of the international community, as well as the various inter-regional societies, the individual countries have also enacted legislation in respect of the bankruptcy proceedings. The most representative efforts of individual countries comprise the U. K. Insolvency Act 1986,the German International Insolvency Law 2003, the Spanish Insolvency Act 2003, the U. S. Bankruptcy Code 2005 modelling on the UNCITRAL Model Law and the Bankruptcy Act of the PRC 2005; all of these acts contain the rules on cooperation between courts exercising jurisdiction in relation to insolvency. Furthermore, some countries regulate the issue of cooperation on bankruptcy proceedings by reference to the Codes of Private International Law; for example, Chapter 11 of the Swiss Code of Private International Law 1987 brings in “Bankruptcy and Composition Agreements” which embraces a number of issues on judicial cooperation in terms of bankruptcy such as recognition (Art. 166), procedure (Art. 167), and protective measures (Art. 168), and Chapter XI of the Belgian Code of Private International Law 2004 also refers to five articles to govern the judicial cooperation concerning collective bankruptcy proceedings. For the grant of recognition to the foreign bankruptcy judgments, it is generally required that 1. The foreign bankruptcy judgments are final and enforceable in the original country; 2. No refusal grounds applicable to the refusal of other civil and commercial judgments exist; 3. The principle of reciprocity is assured such as Art. 166 of the Swiss Code of Private International Law.Protective measures can be found under individual countries’ laws to assist the recognition of the foreign bankruptcy judgments.

Conclusions and propositions

As can be seen from the above discussion, three levels of international community have all dedicated to resolve the issues containing the foreign bankruptcy proceedings, as well as the resulting judgments. Deference is normally shown to foreign bankruptcy judgments, especially in view of the fact that countries are more and more closely connected and mutual judicial assistance is unavoidable. For a judgment creditor (or liquidator or representative) in an international bankruptcy proceeding, several conclusions and propositions can be given here if an international bankruptcy proceeding is to be initiated or the recognition of bankruptcy judgments abroad is entailed.

First, international jurisdiction must be ensured before a bankruptcy proceeding is instituted against the debtor. It is widely accepted that international jurisdiction can be satisfied if the center of main interests of the debtor is located in the adjudicating country. A distinction is routinely made between the main insolvency proceedings and the secondary (or non-main) insolvency proceedings, and the bankruptcy judgments handed down in the main insolvency proceedings as opposed to thesecondary insolvency proceedings are normally given priority in the winding up of the insolvents and are quite likely to be recognized in the foreign countries.Second, after obtaining favorable bankruptcy judgments before commencing the application procedure for the recognition, the judgment creditors or liquidators must examine if there exists any available international treaties or regional regulations since these international or regional instruments can provide more sufficient guarantee in comparison with the individual countries’ rules.Third, the conditions and defenses regarding the recognition and enforcement of bankruptcy judgments are unanimously required either under the international or regional instruments or under the domestic rules.It is of a key issue to meet such conditions and avoid the occurrence of the defenses. Files or proofs or documents must be well prepared or even certified as required.

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