Presentation_ Preparing for the Next Crash

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Preparing for the Next Crash: a UN Insolvency Convention,
EU Amendments and National Law Reform
October 5, 2015
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Preparing for the Next Crash
Preparing for the Next Crash: a UN Insolvency
Convention, EU Amendments and National Law Reform
Session / Workshop Chair(s)
Patrick Rona Duane Morris LLP, New York,
USA; Co-Chair Legislation
and Policy Subcommittee
Description
The next global economic crisis is inevitable,
and it could be worse than the last – are we
prepared? A panel of visionary leaders of law
reform at national, EU and UN levels will
discuss what is needed, what has been done
and what must still be accomplished to
facilitate restructuring, rather than
disintegration, of global business concerns in
the next downturn.
Speakers
James Giddens Hughes Hubbard & Reed
LLP, New York, USA
Thomas McInerney Loyola University of
Chicago School of Law;
Treaty Effectiveness
Initiative, Rome, Italy
Ondrej Vondracek European Commission,
Brussels, Belgium
Robert van Galen NautaDutilh, Amsterdam,
Netherlands; European
Liaison Officer
Insolvency Section
Location
Hall K1, Level -2
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Panel, cont’d
Patrick N.Z. Rona – Moderator & Speaker
Patrick N.Z. Rona is an international corporate finance and insolvency
lawyer. He works on cross-border restructurings, mergers and
acquisitions, as well as debt and equity offerings (public and private). Mr.
Rona started his legal career in emerging markets working for Baker &
McKenzie in Budapest. He was president and CEO of the U.S.
subsidiary of a publicly listed company. Mr. Rona is multilingual and has
worked in many jurisdictions. Early in his career, Mr. Rona served as
law clerk to the Honorable Stuart M. Bernstein and the Honorable Arthur
J. Gonzalez of the U.S. Bankruptcy Court for the Southern District of
New York, and he spent two years training in General Electric's Financial
Management Program prior to entering law school. Mr. Rona is an
Officer of the IBA and Co-Chair of the Legislation and Policy
Subcommittee of its Insolvency Section. Mr. Rona represents the IBA at
the United Nations Commission on International Trade Law, Working
Group V.
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Panel, cont’d
Robert van Galen
Mr. Galen is specialises in insolvency law with an emphasis on cross-
border issues and is heading NautaDutilh’s Insolvency and restructuring
Group. He has been involved in virtually all major cases in the
Netherlands over the past 25 years, such as Barings, Fokker, GTS,
KPNQwest, Lehman, Yukos and OSX. He is furthermore admitted to the
bar of the Dutch Supreme Court and has been involved in a number of
important cases decided by the Dutch Supreme Court.
NautaDutilh’s Insolvency and Restructuring Group has been listed
already for many years in the top tier in all the major league tables and
to the extent such tables also rank individuals, Robert is consistently
listed in the top tier. Chambers quotes him as "incredibly clever and very
academic, as well as very calm under fire. The star of the Netherlands in
this field".
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Panel, cont’d
James W. Giddens
Mr. Giddens is chair of Hughes Hubbard’s Corporate Reorganization and
Bankruptcy Group. He is generally recognized as the country’s leading
expert on brokerage firm liquidations, having been selected by the
Securities Investor Protection Corporation (“SIPC”) to be Trustee on
several of the largest and most complex liquidations in history. In
addition to brokerage liquidations, Mr. Giddens represents financial
institutions and companies in major corporate reorganization and
insolvency matters.
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Panel, cont’d
Tom McInerney
Mr. McInerney is the founder and director of the Treaty Effectiveness
Initiative. He serves as legal counsel and consultant to multilateral
organizations, treaty secretariats, international NGOs, governments, and
companies on international law and development, regulatory, and treaty
strategy. Previously he was Director of Research, Policy, and Strategic
Initiatives for the International Development Law Organization, where he
built a research function and led a significant publication effort, directed
the Organization’s partnerships with the United Nations, and led strategic
planning. In 2013, he developed and taught the course “Operationalising
Treaties” for the LLM program on Law, Governance, and Development at
Australian National University and was a Visitor with the Regulatory
Institutions Network (RegNet). He also teaches on the socio-economic
aspects of state-building and development for the Rule of Law for
development LLM program at Loyola University of Chicago.
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Panel, cont’d
Andrej Vondracek
Mr. Vondracek is the Legal and Policy Officer for the European
Commission, DG Health & Consumers in Brussels, Belgium. He is
legal and policy officer in the area of product safety, market
surveillance, internal market, WTO and FTA issues (Awards: Best impact
assesment on small and medium enterprises (by EUROCHAMBERS).
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Outline of our Programme Today
• We start by describing the EC Regulation on Insolvency Proceedings and
its “Modified Universality” approach;
• Robert van Galen who has been involved in virtually all major cases in
The Netherlands over the past 25 years will tell us if his experience is
more like “Universalism within Europe” and “Territoriality” outside of
Europe;
• We will discuss “Synthetic Proceedings” and “Group Insolvencies” that
can be managed in one court within Europe;
• Andrej Vondráček, Legal and Policy Officer of the European Commission
will address the evolution and the history behind the adoption of the
European Insolvency Regulation -- has universalism or modified
universalism been achieved within Europe?;
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Outline of Programme Today, cont’d
• We discuss the UNCITRAL Model Law and how its ability to enhance
unity in worldwide bankruptcy proceedings is in doubt;
• We ask are we “On the Road to Universalism” and do we want
universalism?;
• Liquidation Trustee Jim Giddens will describe how far we are from unity in
Cross-Atlantic Insolvency Proceedings and how his liquidation of Lehman
Brothers, Inc. (LBI) and MF Global can best be described as “Trial by
Combat.”;
• Ondřej and Robert will also address the EU Commission’s new approach
to business failure and insolvency -- are most of the substantive law
disparities between member states resolved or close to being resolved?;
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Outline of Programme Today, cont’d
• Ondřej will tell us if the building blocks for the Capital Markets Union by
2019, will include provisions to facilitate Cross-Border Insolvencies and
what that may mean regarding any insolvency convention efforts;
• The panel will discuss past attempts at a convention and what the current
hurdles may be; and
• Prof. Thomas McInerney, the Founder and Director of the Treaty
Effectiveness Initiative with appointments in Australia, Italy and the
U.S., will address how effective or ineffective treaties and/or
conventions can be.
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The European Union Convention on
Insolvency Proceedings
• Passed in 1995 with final adoption in 2000
• The E.U. Convention adopted a “Modified
Universality” approach:
– The Convention seeks to reconcile the principle of
universality and the protection of local interest and also
the principles of respective legal systems ... permits
local proceedings governed by their own lex fori
concursus (law applicable to the place of insolvency) to
co-exist with the main universal proceeding. Single
universal proceedings are always possible within the
EC, but the Convention does not exclude the opening
of local proceedings, controlled and governed by its
rules, to protect those local interests.
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Modified Universalism
• Modified Universalism, while embracing the core concept
of one main proceeding, allows for countries other than
the home country of a multinational, to “evaluate the
fairness of the home country procedures and to protect the
interests of local creditors.”¹ Thus, it permits secondary
proceedings to be entered on a case-by-case basis.²
1 Michalis E. Diamantus, Arbitrator Contractualism in Transnational Bankruptcy, 35 Sw. L.
Rev. 327, 336-37 (2006).
2 Maxwell Communication Corp. PLC v. Barclays Bank, 170 B.R. 800, 816 (Bank,
S.D.N.Y. 1994).
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Has Modified Universalism Been
Achieved Within Europe?
A. Synthetic Proceedings
− In 2006, a UK administrative proceeding managed to avoid opening a
non-union proceeding in Spain while protecting the treatment of trade
creditors in Spain. See Collins v. Aikman; see also Nortel Networks; and
MG Rover. What are the limitations of these cases?
B. Group Insolvencies (Art. 60)
− Right to be heard in any group proceedings
− Right to request a stay of any measure in group proceedings (max 3//6
months)
 A restructuring plan has been proposed which would be to the benefit of the creditors in
the proceedings for which the stay is requested
 The stay is needed for the implementation of the restructuring plan
 no coordination proceedings opened with respect to either company
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Are we “On the Road to Universalism”?
• Prof. Irit Mevorach in 2011, formerly of The World Bank, concluded as
follows:
“The ability of the UNCITRAL Model Law on Cross-Border Insolvency
to enhance unity in bankruptcy (i.e., universalism) has been doubted.
Unlike the EC Regulation on Insolvency Proceedings, it does not
provide rules on international jurisdiction and automatic recognition.
Thus, both recognition of foreign proceedings and relief should be
sought. The Model Law (like the EC Regulation) also lacks rules for
corporate groups. For these reasons, commentators have predicted
that countries implementing the Model Law will exploit the discretion
and flexibility enshrined in this regime to protect local interest and will
avoid maximum cooperation and deference to foreign jurisdictions.
Nonetheless, this paper suggests that the Model Law has the potential
of facilitating unified and centralised proceedings both for single and
group companies.” 3
3 Irit Mevorach, On the Road to Universalism: A Comparative and Empirical Study of the UNCITRAL Model Law on
Cross- Border Insolvency, 12 Eur. Bus. Org. L.Rev. 517, (2011)
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Universalism
• Back in the 1980’s and 1990’s, most academic
commentators viewed universality as “the proper goal” of
international bankruptcy law.4
• The problem with Universality is that it needs a treaty or
convention in order to be truly effective.
4 Jay Lawrence Westbrook, Choice of Avoidance Law in Global Insolvencies, 17 Brook. J.
Int’l L. 499, 515 (1991).
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Universalism (cont’d)
• The International Bar Association and our esteemed
colleagues Bruce Leonard and Christopher Besant
published a third draft of the Model International
Insolvency Cooperation Act in 1988 and advised: “insofar
as possible, …universality should be the guiding principle
of all efforts, towards international insolvency cooperation,
for it alone is truly compatible with the realization of equal
treatment of all creditors, debtors, assets and liability, and
the swift and effective administration of the estate.5
5 Model International Co-Operation Act (International Bar Association, third draft 1988), reprinted with
current issues in cross border insolvency and reorganizations APP. 1, at 262. (E. Bruce Leonard and
Christopher W. Besant., 1994)
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Universalism (cont’d)
• “Universalism” is a system in which a single bankruptcy
court controls the administration of the debtor’s assets and
makes distributions to creditors worldwide. That single
bankruptcy court may be the court of the country
designated in the articles of incorporation, the court of the
country in which the debtor is incorporated, the court of
the country in which it has its headquarters, of the court of
the country has the bulk of its assets or operations.6
6 Lynn M. Lo Pucki, Cooperation in International Bankruptcy: A Post Universalist Approach, 84 Cornell Law
Review 696, 704 (1999)
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What Specifically Does the Model Law not
Address?
• The Model Law does not provide uniform Choice-of-Law Rules and
each jurisdiction involved may apply its own private international
laws.
• Universalist types of relief such as enforcement of a foreign
discharge or turnover of assets.
• The inefficiencies and loss of value which still arise among Model
Law countries that adopt the Model Law in different ways.
• Countries, like Korea, Canada and Mexico, refrain from enacting
the more ambitious, universalist parts of the Model Law, such as
recognition based on a set of objective criteria (COMI), automatic
relief and other discretionary relief.
• Most OECD countries like Austria, Belgium, Finland, France,
Germany, Italy, The Netherlands, Norway and Sweden have not
adopted the Model Law and, indeed, most of the UNCITRAL
member states (60 in all) have not.
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Lehman Brothers & MF Global:
Trial by Combat
• Universalism under the Model Law is not being applied on a substantive basis,
it only exists as a procedural accommodation;
• Territorialism is absolutely triumphant on the crucial and substantive economic
issues;
• In Lehman, there were 76 separate insolvency proceedings, with three major
ones in the US and UK;
• Both Lehman & MF Global required settlements with UK entities that were
very difficult to reach.
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Overview of key int'l insolvency
instruments7
Bilateral or regional efforts
- Latin America: Montevideo (1889, 1940), Havana (1928)
- Europe: Nordic countries (1933) + various bilateral conventions
- Africa (French speaking): OHADA Uniform Bankruptcy Law (1998)
Istanbul Convention (Council of Europe)
- Opened for signature since 5 June 1990
Model law on cross-border insolvency (UNCITRAL)
- Model law + Guide (1997, 2013), enacted cca 20 in States
- Legislative guidance (2004 + supplemented in 2010 and 2014) + Practice Guide
(2009)
IBA developed Model Instruments
EU Insolvency Convention (1995) >> EU Insolvency Regulations (2000, 2015)
7 Kurt H. Nadelmann, Bankruptcy Treaties, 93 U. Pa. L. Rev. 58 (1944-1945).
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The European Union and the Council
of Europe
Phase 1: In and out of Brussels Convention (60s-80s)
– Convention on jurisdiction and the enforcement of judgments in civil and commercial
matters (insolvency excluded from its scope at the outset)
– Preliminary Draft (Bankruptcy) Convention (1970) >> Draft (Bankruptcy) Convention
(1980): abandoned
>> Council of Europe: Istanbul Convention on Certain
International Aspects of Bankruptcy (1990)
– Signed by 7 CoE Member States but never ratified
– never entered into force (condition: ratification by 3 CoE Member States)
Phase 2: Towards a Bankruptcy Convention (90s)
– Adaptation of the Istanbul Convention and certain Phase 1 concepts
– 23 November 1995 – draft Convention and Explanatory Report submitted for
signature
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The European Union and the Council
of Europe
EU Convention on Insolvency Proceedings (1995)
– by 23 May 1996 signed by 14 out of 15 EU Member States at that time (with the
exception of the United Kingdom)
– Virgos-Schmit (explanatory) report (not approved by the Council)
– Revived in 1999 as a project of EU Regulation
EU Regulations on (general) insolvency
– Regulation (EC) No 1346/2000 on insolvency proceedings, Regulation (EU) 2015/848
on insolvency proceedings (the latter replaces the former as of 26 June 2017)
– concern the applicable law, jurisdiction and recognition and enforcement of
judgments + rules on coordination of cross-border group insolvency
– do NOT concern: insurance undertakings, credit institutions, investment firms and
collective investment undertakings
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Is there a future for more universality?
Efforts to develop a workable international convention
– Problem: reluctance of certain States to change the
recently attained mitigated universality result
– Light of hope: still willingness and energy to move
forward
Harmonisation of substantive insolvency law
– Problem: how to find consensus?
– Light of hope: 2014 Insolvency Recommendation,
without structural reforms low-growth forecast due to
unresolved debt-overhang (insolvency in the forefront)
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UNCITRAL has Sponsored some 10 Conventions …
Key Factors in Developing and Implementing a
Convention Effectively
• Knowledge: starting point for process is good understanding of comparative
experience
• Political: frame issue; raise awareness; identify demand from users; state
support
• Epistemic: cultivate shared understanding of basic norms among relevant
stakeholders (e.g. judicial and regulator network)
• Implementation: gather resources; in kind support through capacity
development, good practice guides
• Strategy: use to guide each stage of process: treaty development,
ratification, and implementation
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What are the Benefits of an International
Insolvency Regime?
• An International Insolvency Regime would:8
– Minimize economic and social costs;
– Maximize each multinational´s going concern value by
instituting a proceeding (or a set of concurrent
proceedings) to authorize an orderly way for the
multinational; and
– Provide a distribution priority that maximizes social
value, while being mindful of disparate and, at times,
mutually exclusive national policies that value certain
kinds of creditors and claims over others.
8 See Alexander M. Kipnis, Beyond UNCITRAL: Alternatives to Universality in Transnational Insolvency,
36 Denv. J. Int’l. L. Pol’y 155, 157(2008)
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What are the Benefits of an International
Insolvency Regime?
• Universalism or some workable modification thereof can
only be achieved through formal international agreement;
• Resolves choice of law and conflicts of law issues;
• Resolves differences in substantive bankruptcy laws;
• Provides for automatic recognition and enforcement of
bankruptcy court orders or judgments throughout the world;
• Fosters the distribution of assets and setting of interests
rates without distortion, leading to more efficient
investment patterns and increased global welfare.9
9 Lucien Arye Bebchuk and Andrew T. Guzman, Analysis of Transnational Bankruptcies, An, 42 J.L. &
Econ. 775 (1999)
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Five Types of Regimes for International
Bankruptcy Exist:
1. Territoriality;
2. Universality or universalism;
3. The Rasmussen corporate charter contractualism (a form of universality);
4. The Westbrook world bankruptcy court International organization for the
adjudication of transnational bankruptcy cases via treaty or
5. LoPucki´s cooperative territoriality, a system of secondary bankruptcy, a
hybrid between territoriality and universality. Courts secondary proceedings
administering would have authority to distribute all of the debtor´s estate in
that court´s country, possibly as modified by Kipnis (automation of claim
allowance process and cooperation on fraudulent transfers).10
Most of these require a Treaty or Convention in order to be
Effective …
10 See Alexander M. Kipnis, Beyond UNCITRAL: Alternatives to Universality in Transnational Insolvency,
36 Denv. J. Int’l. L. Pol’y 155, 186 (2008)
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Please refer any questions or follow-ups to:
Patrick N.Z. Rona
pnzrona@duanemorris.com
DUANE MORRIS LLP
1540 Broadway
New York, NY 10036
Tel: 212-692-1048
Fax: 212-692-1020
www.duanemorris.com
Disclaimer: These materials and panel’s comments are intended for discussion purposes only and are
not intended as legal advice. The views expressed are the personal opinions of the speakers and not
those of the institutions or organizations with which the speakers are affiliated, or of the International
Bar Association or its officers (which make no representation as to the accuracy of the information
communicated).
Thank you for your participation!
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