Across the globe, procedures to restructure financially distressed businesses are increasing in importance. Prima facie, many of these procedures are very different from ‘classical’ insolvency proceedings. Unlike classical insolvency proceedings, restructuring procedures are now, usually, initiated pre-insolvency (as measured on a cash flow or balance sheet test), are conducted by the debtor in possession (‘DIP’) without the appointment of an insolvency administrator, and often only affect certain creditors or groups of creditors. Thus, should such procedures nevertheless be characterised as insolvency proceedings?
In a recent paper I attempt to develop a new approach to this ‘characterisation problem’. The paper abstracts from existing laws and regulations without disregarding them as an intellectually and practically relevant resource. The paper deals exclusively with insolvency proceedings in a cross-border context, in Europe and beyond. Against this background, the research question of the paper can be restated precisely as: which proceedings should, in a cross-border context, be characterised as insolvency proceedings such that their effects merit immediate universal recognition? When using the term ‘recognition’ I have in mind a strong form of recognition as embodied, for example, in Articles 19(1) and 32(1) of the European Insolvency Regulation (‘EIR’): the effects of the proceeding are legally translated into other jurisdictions immediately without the need for exequatur proceedings.
In a first section of the paper, I examine existing approaches to the characterisation problem. Thus, I examine the scope of Article 1 EIR (as recast), Article 2 of the UNCITRAL Model Law on Cross-Border Insolvency (1997), as well as US case law under Chapter 15 of the Bankruptcy Code. All in all, a comparative analysis of existing approaches to the characterisation problem in a cross-border context yields a disappointing result. A noticeable international trend is to relax both the collectivity requirement and the insolvency requirement. As a consequence, the contours of ‘insolvency proceedings’ get increasingly blurred. A well-founded conceptual and consistent answer to the question ‘What is an insolvency proceeding?’ cannot be derived from existing laws and regulations, or by the interpretation of these laws and regulations by competent courts.
Against this background I take a fresh look at this question and develop a new approach to ‘solving’ the characterisation problem. If one confines the analysis to the cross-border effects of a proceeding, the following conclusion emerges: insolvency proceedings are only those proceedings which attempt to address a common pool problem of the creditors. This is always the case if the proceeding restricts, in one form or another, the enforcement of individual creditor rights. The restriction may be procedural in nature, especially in the form of a universal automatic stay that applies once the proceeding is initiated. The restriction can also take the form of substantive modifications of creditor entitlements to which all creditors, in principle, are subject even if they dissent.
If universal recognition of a proceeding as an insolvency proceeding were limited to fully collective proceedings, states would be pressured into ‘collectivizing’ proceedings to make them more attractive than they would be without such recognition. One may view this as a desirable corollary to the thesis developed in this paper: not every proceeding deserves universal recognition that overrides legitimate creditor expectations with respect to dispute resolution forum and governing law. Only fully collective proceedings merit such grave consequences.
Horst Eidenmüller is the Freshfields Professor of Commercial Law at the University of Oxford.