When Vancouver-based 360Networks Inc. faced insolvency and opted for bankruptcy protection in June 2001, CFO Vanessa Wittman quickly realized that not all workouts are created equal. The filing, for example, caused the company to shut down fledgling operations in Asia and triggered liquidations of its assets throughout Europe–most notably networks it had gained through swaps with other telecom providers. Only in the United States and Canada was the company able to work with the courts to restructure without being forced to liquidate.
Outside of those two countries, says Wittman, “the most developed sense of a bankruptcy procedure is in the United Kingdom.” But even there, bankruptcies aren’t conducted in the spirit of reorganization. “It’s in the spirit of freezing rather than eliminating your debts while you find other funding sources or sell your assets,” she adds. In the UK, the company’s assets were auctioned off piecemeal by a court-appointed administrator to pay off local creditors.
Most companies with overseas assets that file for bankruptcy face similar situations. The laws of the country in which they file do not apply in the countries where assets are located. And more often than not, the laws in those other countries lead to one outcome–liquidation. It is only in the United States, Canada, and some other common-law countries (where court precedent creates and interprets laws) that the concept of restructuring and court protection from creditors is stressed.
Even in economically developed nations like France and Germany, the rule is more akin to “one strike and you’re out.” These countries, which are ruled by civil law (laws handed down in a code that dates back to the Roman or Napoleonic empires), hold to the assumption that bankruptcy is management’s fault, and the first priority is to pay back local creditors by liquidating assets.
A country’s civil insolvency laws don’t make concessions for bankruptcy proceedings in other countries. “The civil law has always been territorial,” says Bruce Leonard, a cross-border insolvency attorney at Cassels Brock & Blackwell in Toronto and a delegate to the United Nations Commission on International Trade Law (Uncitral).
While these disparate rules were once the concern of only a few corporations, the increasingly global nature of business, coupled with the recent economic downturn, have fueled cross-border insolvencies. Although no specific data is available, bankruptcy experts say there has been a marked upswing in the number of cases in which a corporation files for multicountry bankruptcy protection. Big cases include Laidlaw, Global Crossing, and, of course, Enron. “About 10 years ago, you could hardly find a major bankruptcy case with an international aspect,” says Leonard. “Now it’s hard to find a case without one.”
Fortunately for these distressed corporations, a variety of government, legislative, and professional organizations have started to make progress toward bridging the gaps in how the world views bankruptcy. Organizations as diverse as Uncitral and Insol–a group composed of insolvency attorneys, creditors, and judges–have been working hard to create agreement on how these cases will proceed. Meanwhile, at the end of May, the European Union moved to simplify insolvency proceedings across member states. And ever so slowly, hopes are growing for the Holy Grail of bankruptcy laws–a uniform global code.