International Journal of Legal Studies and Research (IJLSR)

CROSS-BORDER INSOLVENCY PROTOCOLS: A SUCCESS STORY? Akshaya Kamalnath1 “In areas of law, such as cross-border insolvency, commercial necessity has encouraged national courts to provide assistance to each other without waiting for such cooperation to be sanctioned by international convention.” - Millet L.J.2 1.

Introduction

In the last two decades the economies of the world have become more interconnected than ever thus promoting cross-border businesses that own assets in many countries. This makes insolvencies of a cross-border nature more inevitable than ever and therefore the question of how these insolvencies can be carried out in an efficient and workable manner becomes pertinent. Cross-border insolvency protocols emerged as an answer to this with judges approving protocols that encourage coordination, cooperation and communication between the courts, courts and parties and between the parties themselves. As these insolvency protocols became more popular, guidelines and model laws emerged to be used as guides to the drafting of these protocols. However since these protocols, by their very nature, are case specific and are meant to address the particular circumstances of each case, they are constantly changing and adding to the resources future cases can look to while adopting such protocols. 1.1

What is an insolvency protocol?

UNCITRAL, in its Practice Guide on Cross-Border Insolvency Cooperation, defines an insolvency protocol as “an agreement entered into, either orally or in writing, intended to facilitate the coordination of cross-border insolvency proceedings and cooperation between the courts, between the courts and insolvency representatives and between insolvency representatives, sometimes also involving other parties in interest.” Protocols are usually adopted and/ or approved by the courts involved in accordance with the local law and practice of each local jurisdiction. Despite this, the beneficial feature of an insolvency protocol, as against a 1 2

LLM (Corporations) Student at NYU Law Credit Suisse Fides Trust SA v. Cuoght: [1997] ALL ER 724(at 730).

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binding treaty or convention is that it can be tailored to the needs of each case. Thus protocols are case specific, but at the same time tend to address certain core issues faced in most cross-border insolvencies. They usually specify what their aim is whether it is facilitating reorganization of the business, protecting the integrity of the process of administration, or ensuring timely and efficient mechanisms for resolution of claims disputes. They also undertake to the setting up of a mechanism for courts to coordinate activities so that any action may be determined by one court. Communication between courts including joint hearings is also addressed. Notice procedures aimed at parties in all jurisdictions getting equal treatment is another aspect that is dealt with. Providing all interested parties, the right to be heard is also important. The retention and payment of professionals is another issue that is usually provided for. 1.2 The specific problems encountered in cross-border insolvency cases In cross-border insolvency cases, courts, the administrator, liquidator or receiver in charge of the insolvent entity and all interested parties like creditors have to grapple with two significant problems. First is the difficulty in coordination and conflict-less resolution of the insolvency by all the courts concerned. Second is the fact that different jurisdictions have differing substantial laws to deal with bankruptcy. In the earlier cases, the difference in corporate insolvency philosophies in different jurisdictions was also problematic. In the U.S., the debtor remains in control of the bankrupt entity after filing for bankruptcy3 while in Europe, the debtor is seen as someone who cannot be trusted with running the insolvent entity anymore. Reconciling such a difference in underlying philosophies would prove to be a challenge even in coordination between courts if the court in one jurisdiction does not trust the person running the entity in another jurisdiction.

3

Mark S. Scarberryet. al, Business Reorganization in Bankruptcy, 245(3rd ed. 2006). (In the U.S. it is considered advantageous for the debtor to remain in possession of the estate for many reasons. First, it ensures that managers of a troubled company will not put off filing for bankruptcy in order to prevent losing their jobs. Second, in many cases, the debtor changes managers before filing for bankruptcy especially in a large publicly held company. Third, a trustee will need more time to understand the issues facing the company before taking corrective actions as against managers who are already conversant with the situation. Finally, in theory, the debtor in possession is supervised by the United States Trustee and the creditors’ committee.)

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1.3

How can insolvency protocols address these problems?

Insolvency protocols attempt to harmonize cross-border insolvency proceedings where there are simultaneous primary proceedings in more different jurisdictions through a framework that facilitates cooperation and communication among the courts and parties in multiple concurrent insolvency proceedings. 4 Some protocols have dealt with the issue of the debtor being in possession of the estate of the insolvent entity in the U.S., by appointing a court examiner, which is more acceptable to courts in other jurisdiction.5 1.4

Research aim and conclusions

The purpose of this paper is to determine the future course of cross-border protocols as tailor made arrangements between parties and courts. What or who makes these insolvency protocols effective? With countries adopting legislations based on the model law, the question that is often asked is, are insolvency protocols still needed? If yes, what role will they play in the future and what form will they take? These are some of the questions this paper seeks to answer. For this it examines the philosophical and legal bases for insolvency protocols and then briefly presents cases relevant to the discussion. Based on this analysis, this paper makes three conclusions. First, it concludes that judges and courts have played an important role in the development of insolvency protocols and will perhaps play an even more significant role in the future. Second, it concludes that insolvency protocols between Canada and the U.S. being used more frequently have become more sophisticated and predicts that future insolvency protocols would follow suit. Third, it concludes that insolvency protocols are still relevant and will continue to be relevant despite a large number of countries adopting the Model law because each country’s version of the model law varies from the other and also because in multi-jurisdiction cases, insolvency protocols could greatly help in coordination. 2.

Insolvency protocols: philosophical basis

This section studies the philosophical debates surrounding cross-border insolvency. These philosophies inform the model laws and international

4

Paul H. Zumbro, Cross-Border Insolvencies and International Protocols — An Imperfect but Effective Tool, 11 BUS. L. INT’L 157, 164 (2010). 5 For example Maxwell and Olimpia and York protocols. This has been dealt with in more detail later in this paper.

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guidelines with respect to insolvency and also the scope of insolvency protocols. 2.1

Universalism versus territorialism

The two competing philosophical underpinnings that inform cross-border insolvency are universalism and territoriality. The essence of universalism is to have a unified insolvency proceeding even where the interests of parties in various jurisdictions may be involved. It advocates efficiency and equity of process, so as to achieve a better distribution to all the parties involved.6 Territorialism on the other hand seeks to protect local creditors by applying local laws.7 Therefore bankruptcy courts, as per this philosophy, will have jurisdiction over the assets in their territory which means that multiple proceedings would have to be initiated in each nation where the debtor’s assets are located.8 While a universalism approach would maximize the value available for distribution for all creditors, territorialism would encourage grabbing of assets in different jurisdictions and bring down this value.9 Somewhere in the middle of these two competing philosophies, lies, what Prof. Jay Lawrence Westbrook calls, ‘limited cooperation’.10 He uses this term to describe various approaches that lie in between universalism and territorialism. Insolvency protocols were used in cases where primary proceedings are commenced in different jurisdictions with cooperation between the different jurisdictions involved. 11 More recently, the Lehman Protocol was entered into by all the interested parties as the bankruptcy filing resulted in more than seventy-five separate proceedings around the world.12 Insolvency Protocols so far have been influenced both by considerations of universality inasmuch as they promote worldwide cooperation and

6

Evan D. Flaschen and Ronald J. Silverman, Cross-Border Insolvency Protocols 33 Tex. Int’l.J.587, 588. 7 Id. 8 Chapter 15 and Cross-Border Bankruptcy 124 Harv. L. Rev. 1292,1293. 9 Judge Lifland in his talk in “Third Multinational Judicial Colloquium UNCITRAL – INSOL International” held in Germany, October 1999, online: http://www.uncitral.org/pdf/english/news/ThirdJC.pdf. (Last Visited on August 15, 2013) 10 Jay Lawrence Westbrook, Choice of Avoidance Law in Global Insolvencies, 17 Brook. J. Int'l L. 499. 11 Id. 12 Jamie Altman, A Test Case in International Bankruptcy Protocols: The Lehman Brothers Insolvency12 San Diego Int'l L.J. 463, 464.

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territoriality inasmuch as they try to protect local rights material to each of the jurisdictions involved.13 2.2

Comity

Mr. Justice Grey defines comity as “the recognition which one nation allows within its territory to the legislative, executive or judicial acts of another nation, having due regard both to international duty and convenience, and to the rights of its own citizens or of other persons who are under the protection of its laws.” 14 Thus comity can be seen as a philosophy or a judicial approach to cross-border insolvency cases. Cross-border insolvency protocols can be seen as examples of the application of this principle of comity as these protocols aim to harmonise the law of different jurisdictions in cross-border insolvency cases. In the words of Edward T. Canuel15 ‘the principle of comity is the "middle ground" between broad universalism and isolated territoriality, which justifies the enactment of a protocol.’ 3.

Laws, guidelines, principles

This section will briefly examine the various international and national laws, principles and guidelines that address cross-border insolvencies. Through this, it aims to establish a legislative basis for cross-border insolvency protocols. 3.1Cross-border insolvency Concordat The Cross-border insolvency Concordat (Concordat) 16 also reflects modified universalism or modified territorialism, depending on one’s perspective. 17 It was created by the International Bar Association as an intermediate step to the adoption of treaties and/ or statutes being adopted

13

Flaschen, supra note 6 at 589. Hiltonv.Guyot, 159 U.S. 113, 164 (1895). 15 Edward T. Canuel, Canadian Insolvencies: Reviewing Conflicting Legal Mechanisms, Challenges and Opportunities for Cross-Border Cooperation, 4 J. Int'l Bus. & L. 8, 14. 16 Cross-Border Insolvency Concordat adopted by the Council of the International Bar Association Section on Business Law (Paris, 17 September 1995) and by the Council of the International Bar Association (Madrid, 31 May 1996), online: http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CCYQFj AA&url=http%3A%2F%2Fwww.ibanet.org%2FDocument%2FDefault.aspx%3FDocument Uid%3D2d55e76f-cab1-493d-b0a94b4b967b353f&ei=BnihT8vxNqLa0QGk1omjCQ&usg=AFQjCNGLpxHQVw_Li91sDv9 HPLa86DTe-A&sig2=KrPtSE13bEiHC-kjriSJ7w (Last visited on August 15, 2013) 17 Anne Nielsen, Mike Sigal and Karen Wagner, International Law Simposium: Article: The Cross-Border Insolvency Concordat: Principles to regulate the facilitation of international insolvencies, 70 Am. Bankr. L.J. 533, 533; see also, Altman, supra note 12 at 477. 14

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by nation states, and sets forth principles applicable to all types of international insolvency cases.18 Principle 419 of the Concordat expressly provides that where there is more than one primary proceeding, the forums should coordinate with each other, subject in appropriate cases to governance protocols.20 Cross-border insolvency protocols based on the Concordat model were initially entered into between the U.S. and Canada. 21 The Concordat principles have formed the basis for a number of successful protocols such as, the Everfresh protocol22 and the protocol in the case of In re Joseph Nakash. 23 Following pre-set guiding principles, like those set out in the Concordat which addresses most issues encountered in cross-border insolvencies, make drafting and negotiating protocols more efficient.24

18

Altman, supra note 12 at 477. Supra note 16, “Where there is more than one plenary forum and there is no main forum: (a) Each forum should coordinate with each other, subject in appropriate cases to a governance protocol. (b) Each forum should administer the assets within its jurisdiction, subject to principle 4(f). (c) A claim should be filed in one, and only one, plenary forum, at the election of the holder of the claim. If a claim is filed in more than one plenary forum, distribution must be adjusted so that recovery is not greater than if the claim were filed in only one forum. (d) Each plenary forum should apply its own ranking rules for classification of and distribution to secured and privileged claims. (e) Classification of common claims should be coordinated among plenary fora. Distributions to common claims should be pro-rata regardless of the forum from which a claim receives a distribution. (f) Estate property should be allocated (after payment of secured and privileged claims) among, or distributions should be made by, plenary for a based upon a pro - rata weighing of claims filed in each forum. Proceeds of voiding rules not available in every plenary forum should be alternative a: allocated pro - rata among all plenary fora for distribution. Alternative b: allocated for distribution by the forum which ordered voiding. (g) If the estate is subject to local regulation that involves an important public policy (such as a banking or insurance business), local assets should be used first to satisfy local creditors that are protected by that regulatory scheme (such as bank depositors and insurance policy holders) to the extent provided by that regulatory scheme.” 20 Susan Power Johnston and John Han, A Proposal for Party Determined COMI in CrossBorder Insolvencies of Multinational Corporate Groups, 16 J Bankr L &Prac 811, 816. 21 UNCITRAL Practice Guide available at http://www.uncitral.org/pdf/english/texts/insolven/Practice_Guide_english.pdf. (Last visited on August 15, 2013) 22 See discussion infra Section 4.4. 23 See discussion infra Section 4.2. 24 Altman, supra note 12 at 478. 19

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3.2

Model law

UNCITRAL Model Law on cross-border insolvency (“the Model Law”),25 and national legislations based on it, are touted by many as ‘modified universalism’ or ‘limited universalism’ thus situating them in the middle of the two competing philosophies of universalism and territorialism. What the Model law envisages is that the primary proceeding commences in one jurisdiction with ancillary proceedings in others.26 The Model Law aims to achieve its main goals 27 by facilitating the recognition of foreign proceedings, information sharing between courts and principals, equal access to courts, principals, and parties with claims against a debtor, and finally organization of cases where multiple main proceedings are taking place involving a single debtor.28 Clearly, the Model Law takes a procedural approach to cross-border insolvency inasmuch as it creates a level playing field by making the substantive law of a jurisdiction accessible to foreign representatives. 29 Chapter IV of the Model Law expressly authorizes jurisdictions to employ cross-border protocols. Article 25 30 authorizes cooperation by means of direct communication or seeking assistance between courts of different jurisdictions and between a court and the foreign representatives. Article

25

UNCITRAL Model law on crossborder insolvency, online: http://www.uncitral.org/pdf/english/texts/insolven/insolvency-e.pdf. (Last visited on August 15, 2013) 26 David Lord, Cross-Border Insolvency Protocols – do they work?, online: http://clients.squareeye.net/uploads/3sb/events/300904_lord.pdf. (Last visited on August 1, 2013) 27 Ian Fletcher states that ‘[t]he four cornerstones of the Model Law can be represented by four primary concepts: Access, Recognition, Relief, and Cooperation.’ See Ian F. Fletcher, Insolvency in Private International Law: National and International Approaches 443-51 (Oxford 2d ed 2005). 28 Anthony V. sexton, Current Problems and Trends in the Administration of Transnational Insolvencies involving Enterprise Groups: The Mixed Record of protocols, the UNCITRAL Model Insolvency Law, and the EU Insolvency Regulation, 12 Chi. J. Int’L.811, 825. 29 Matthew T. Cronin, UNCITRAL Model Law on Cross-Border Insolvency: Procedural Approach to a Substantive Problem, 24 J. Corp. L. 709,710. 30 Supra note 25, “Article 25: Cooperation and direct communication between a court of this State and foreign courts or foreign representatives: 1. In matters referred to in article 1, the court shall cooperate to the maximum extent possible with foreign courts or foreign representatives, either directly or through a [insert the title of a person or body administering a reorganization or liquidation under the law of the enacting State]. 2. The court is entitled to communicate directly with, or to request information or assistance directly from, foreign courts or foreign representatives.

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26 31 authorizes cooperation between the administrating body/ bodies or person/s with the courts and foreign representatives. Article 2732 suggests possible forms of cooperation for implementing the cooperation that Articles 25 and 26 authorize. It lists the approval or implementation of agreements concerning the coordination of proceedings, as one form of cooperation. 3.3

ALI Guidelines

The ALI guidelines applicable to court-to-court communications in crossborder insolvency cases (ALI Guidelines)33 were drafted in 2000 by the American Law Institute and the International Insolvency Institute as part of the Transnational Insolvency Project, which resulted in Principles of Cooperation among the NAFTA Countries.34 In the introduction, the ALI Guidelines emphasize the need for cooperation and coordination between courts to maximize assets for all creditors.35They recognize that one of the most essential elements of cooperation in cross-border cases is 31

Article 26: Cooperation and direct communication between the [insert the title of a person or body administering a reorganization or liquidation under the law of the enacting State] and foreign courts or foreign representatives 1. In matters referred to in article 1, a [insert the title of a person or body administering a reorganization or liquidation under the law of the enacting State] shall, in the exercise of its functions and subject to the supervision of the court, cooperate to the maximum extent possible with foreign courts or foreign representatives. 2. The [insert the title of a person or body administering a reorganization or liquidation under the law of the enacting State] is entitled, in the exercise of its functions and subject to the supervision of the court, to communicate directly with foreign courts or foreign representatives. 32 Article 27: Forms of cooperation Cooperation referred to in articles 25 and 26 may be implemented by any appropriate means, including: (a) Appointment of a person or body to act at the direction of the court; (b) Communication of information by any means considered appropriate by the court; (c) Coordination of the administration and supervision of the debtor’s assets and affairs; (d) Approval or implementation by courts of agreements concerning the coordination of proceedings; (e) Coordination of concurrent proceedings regarding the same debtor; (f) [The enacting State may wish to list additional forms or examples of cooperation].” 33 Guidelines Applicable to Court-to-Court Communications in Cross-Border Cases, as adopted by The American Law Institute in 2000, online: http://www.ali.org/doc/Guidelines.pdf. (Last visited on August 10, 2013) 34 Altman, supra note 12 at 485. 35 Id.

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communication among the administrating authorities of the countries involved and try to address the difficulties involved.36 The ALI Guidelines consist of seventeen principles and these principles are not meant to be static but and courts and parties are to adopt them in a flexible way, adapting them to the circumstances. Most notably, ALI Guideline 9 allows courts to conduct joint hearings by means of any twoway communication which enables the courts to simultaneously hear each other.37 Thus these guidelines too, like the Model Law do not provide for changes to the substantive law of nations but merely aim to provide procedural guidance for communication between courts in cross-border insolvency cases. The guidelines have been used in many protocols by courts in the U.S. and in other jurisdictions. 38 Mr. Justice Farley, the judge for the Re Matlack Systems Inc. case, not only incorporated the ALI guidelines in the protocol but also took the opportunity to state his approval for the guidelines from the Canadian side.39 3.4

U.S. - Chapter 15

Chapter 15 40 was incorporated into the Bankruptcy Code in 2005 and it largely follows the Model Law. It replaced section 30441 of the Bankruptcy Code, which had been enacted as part of the Bankruptcy Reform Act of 1978. Chapter 15 embodies the criteria for granting additional assistance to a foreign proceeding that was laid out in section 304 and moves the granting of comity to the introductory language. This is to emphasis that it is the central concept that has to be considered.42 Following the Model Law, Chapter 15 authorizes the use of protocols by providing for cooperation through ‘approval or implementation of agreements concerning the coordination of proceedings’.43 36

Bruce Leonard, The Development of Court-to-Court Communications in Cross-Border Cases, 17 J Bankr L &Prac 619, 622 (2008). 37 Altman, supra note 12 at 486. 38 See, e.g., Madoff Protocol discussed infra Section 4.6. 39 Leonard, supra note 36 at 622. 40 Chapter 15 was incorporated through the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. 41 S. 304 was enacted as part of the Bankruptcy Reform Act of 1978. 42 Developments in the Law: VII. Chapter 15 and Cross-Border Bankruptcy, 124 Harv. L. Rev. 1292, 1293. 43 See 11 U.S.C. § 1527(4) (2006); Cooperation referred to in sections 1525 and 1526 may be implemented by any appropriate means, including:

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With respect to granting recognition to a foreign proceeding, Chapter 15 calls for an analysis of where the debtor has its ‘center of main interest’ (COMI) 44 or if it carries out ‘non-transitory economic activity’ 45 in the foreign country. The former would entitle the debtor to recognition as a ‘foreign main proceeding’46 and the latter would entitle it to recognition as a ‘foreign non-main proceeding’ 47 where assistance available is more limited.48 3.5 The EU Insolvency Regulations and European Communication and cooperation guidelines (CoCo guidelines) The EU Insolvency Regulations came into force in 2002 and are molded from the same modified universalism principles as the Model Law. With the exception of Denmark, they are directly applicable to all member states. One noteworthy feature of the EU Insolvency Regulations is that the European Court of Justice can issue rules that are binding on the participating nations.49 The EU Insolvency Regulations establish the duty of insolvency representatives of different concurrent insolvency proceedings to cooperate and communicate information, but they do not provide much guidance for this. This is provided by the CoCo Guidelines which supply representatives in cross-border insolvency cases with a certain set of standards with respect to communication and cooperation. 50 4.

From Maxwell To Lehman and Madoff

It is apparent from the discussion in Section 2 of this paper that insolvency protocols have been justified through varying degrees of territorialism and universalism as well as comity. Further, efforts have been made internationally and nationally to develop guidelines for insolvency protocols. These guidelines did not come out of thin air but instead they developed due to practical necessity faced by complicated scenarios arising (1) appointment of a person or body, including an examiner, to act at the direction of the court; (2) communication of information by any means considered appropriate by the court; (3) coordination of the administration and supervision of the debtor's assets and affairs; (4) approval or implementation of agreements concerning the coordination of proceedings; and (5) coordination of concurrent proceedings regarding the same debtor. 44 11 U.S.C.§ 1517(b)(1). 45 11 U.S.C.§ 1502(2). 46 11 U.S.C.§1517(b)(1). 47 11 U.S.C.§ 1517(b)(2). 48 Supra note 42 at 1297. 49 Supra note 28 at 832. 50 http://www.uncitral.org/pdf/english/texts/insolven/Practice_Guide_english.pdf.

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in certain cases. A brief study of the initial cases that gave rise to the various laws and guidelines and also the later cases that drew heavily from these guidelines and laws is helpful to evaluate the course of future protocols. In this section I have specifically chosen to study relatively more protocols between Canada and the U.S. in order to highlight the advancement that Canada –U.S. insolvency protocols have made vis-à-vis other protocols. 4.1

Maxwell – The birth of the insolvency protocol

Maxwell Communication Corporation (MCC) is famous for more than just Mr. Robert Maxwell disappearing at sea. More to the topic, In re Maxwell Communication 51 was famous for being the first major case where an insolvency protocol was negotiated.52 In Maxwell, there were two primary insolvency proceedings in the U.K. and the U.S. Justice Hoffman of the High Court of Justice in London appointed as administrators of MCC, insolvency practitioners requested by MCC’s major bank creditors i.e. PriceWaterhouse Coopers (PWC). PWC immediately moved for the Chapter 11 case to be dismissed so that the case could be solely administered in U.K. While U.S. Bankruptcy Judge Brozman was not persuaded by this, she also wanted to avoid any potential conflicts. So she appointed an ‘examiner’, as a neutral, to engage with the U.K. administrators and suggest a course of action, which eventually resulted in the Maxwell Protocol. 53 Both Justice Hoffman and Judge Brozman approved the protocol and cooperated with each other during the process in order for the protocol to be effective. This Protocol provided that maximizing value of the estate and harmonizing the proceedings to minimize waste, expense and jurisdictional conflict.54 It provided for a framework under which the U.K. administrators would deal with the corporate governance of the Maxwell estate but major decisions regarding borrowings and asset realizations would require consent by the U.S. examiner or approval by the U.S. court. However matters of manner of creditor distribution and ultimate resolution of the case were left open. 55 Ultimately the parties resolved these issues through mutually independent plans of reorganization and schemes of arrangement.56

51

93 F.3d 1036 (1996). Evan D. Flaschen and Bingham McCutchen, How the Maxwell Sausage was made, online: http://evanflaschen.net/Maxwell%20Sausage.pdf. (Last visited on August 12, 2013) 53 Id. 54 Id at p. 591. 55 Id. at p. 591. 56 Id at p. 592. 52

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The plan of reorganization and scheme of arrangement was reached within 16 months which as Justice Tina Brozman later said, ‘helped save hundreds of well-known companies that Maxwell had owned’.57 4.2

Nakash – The first protocol with a civil law country

In the case of In re Joseph Nakash58the first protocol between a common law country and a civil law country was entered into. This is significant because civil law requires strict compliance with statutory law and so the Israeli court had to find express statutory authorization for entering into the Nakash Protocol. Further, a civil court also plays a fact finding role which requires greater court involvement. This was the reason why the Nakash Protocol focused on coordinating court proceedings and judicial actions in both jurisdictions, apart from coordination of the parties. 59 This protocol was entered into in the context 60 of what was almost an international jurisdictional impasse with the U.S. court holding that the automatic stay applied extraterritorially and the Israeli court issuing instructions to the Official receiver to obtain attachment orders outside Israel.61 The goals of this protocol were to harmonize and coordinate the two proceedings, honor the integrity of the two courts, promote orderly and efficient administration of the two proceedings, to identify, preserve and maximize the value of the debtor’s assets worldwide and finally to coordinate activities and share information to reduce costs and avoid duplication.62 The protocol delineates three ‘spheres of influence’ to resolve issues. First, for actions to be taken within the U.S., initial authority, relief and/ or redress shall be sought from the U.S. Court. Second, for actions to be taken within Israel, initial authority, relief and/ or redress shall be sought from the Israeli Court. Third, for actions to be taken outside both the U.S. and Israel, initial authority, redress and/or relief shall be sought from both the U.S. and the Israeli courts. In the first sphere, the Israeli court agreed to 57 Testimony of Justice Tina L. Brozman, Chief Bankruptcy Judge for the Southern District of New York before the Subcommittee on Commercial and Administrative Law of the Committee on the Judiciary U.S. House of Representatives on H.R. 1596, The Bankruptcy Judgeship Act of 1997, June 19, 1997, online: http://judiciary.house.gov/legacy/590.htm. (Last visited on August 14, 2013) 58 190 B.R. 763 (1996). 59 Flaschen, supra note 6 at 593. 60 The Official Reciever for the bankruptcy of an Israeli bank obtained an attachment of the assets of Joseph Nakash, one of the bank’s directors in an Israeli court. Nakash’s assets were in the U.S. and so filed a voluntary Chapter 11 petition in the Southern District of New York. When the Israeli Court gave permission to the Official Receiver to file a bankruptcy petition against Nakash in Israel, Nakash sued the Official Receiver alleging that the petition violated the automatic stay; cited in Flaschen, supra note 6 at 595. 61 Flaschen, supra note 6 at 595. 62 Flaschen, supra note 6 at 596-597.

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represent the jurisdiction of the U.S. Court and in the second sphere, the U.S. court agreed to respect the jurisdiction of the Israeli court. In the third sphere, both courts agreed to coordinate efforts, avoid conflicting rulings, to the extent they are lawfully able to do so.63 To achieve this, the courts stated their intent to consult with each other through the Official Receiver and the Examiner via telephonic conference, to the extent feasible, to coordinate efforts and avoid conflicting rulings. 4.3

Olympia and York

Olympia and York 64 was one of the first cross-border insolvency cases between the U.S. and Canada and had the Maxwell case as a precedent before it. Here, the debtor was a Toronto based commercial real estate development company and had its assets in Canada, U.K. and U.S. Insolvency filings were made in all three countries for the protection of assets in the respective countries. This created a lot of confusion as secured creditors of the subsidiary became unsecured creditors of the parent.65 Further, the court appointed representative in Canada, who was a fiduciary of the Canadian creditors 66 , replaced the equity owners of the parent company. The board of directors of the U.S. entity was in charge of running that entity became concerned about the Canadian administrator’s interests. The U.S. bankruptcy court appointed an examiner to assist the parties in negotiating a protocol to address these issues.67 This protocol dealt with the payment of professionals issue by using a more territorial approach. It provided for the professionals in both Canada and U.S. to be paid as per the rules for payment of professionals in their respective county. Apart from this, the protocol mainly focused on corporate governance of the entity.68 4.4

Everfresh

In re Everfresh Beverages Inc69 was a Canada U.S. case where concurrent claims were filed in the U.S. and Canada. Significantly, the judges presiding 63

Flaschen, supra note 6 at 597. Sean Dargan, The Energence of Mechanisms for cross-border insolvencies in Canadian Law, 17 Conn. J. Int'l L. 107, 121. 65 Id. 66 Prior to the Olympia and York case, under Canadian law, a group of lenders would continue to fund the restructuring. The cross-border implications of the O&Y insolvency necessitated a reform of how such funding would occur;Canuel, supra note 15 at 21. 67 Susan Power Johnston and John Han, supra note 20 at 818. 68 Canuel, supra note 15 at 21. 69 238 B.R. 558 (1999). 64

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over the cases in both courts had been involved in the drafting of the Concordat. They approved a protocol (which was developed in a month’s time)70 that aimed to protect all creditors of Everfresh whether they were located in Canada or the U.S. Further this case used the Concordat Principles as guidance in the drafting of the protocol.71 Also significant to note is that this case was also the first time a joint hearing to approve the protocol was used in a Canada – U.S. cross-border insolvency case.72 4.5

Livent

The protocol in Livent used multicast satellite television feed to after Livent had reached a point of court approval for the sale of Livent’s theatre assets in both countries. After a two day hearing, both courts made complementary orders that allowed theatre assets in both cases to be sold to a single purchaser, SFX Entertainment.73 4.6

Madoff Protocol

The protocol was entered into in the Madoff case between the representatives in the U.K. and U.s. The representatives were the joint provisional liquidators of Madoff Securities International Limited in the U.K. on the one hand and Mr. Irving H. Picard, the SIPA (Securities Investor Protection Act) trustee in the liquidation of Bernard L. Madoff Investment Securities LLC on the other hand. The protocol was approved by the U.S. bankruptcy judge. The facts of this case are complicated and involve a securities fraud action by the SEC against the debtor and Mr. Madoff who owned the company. The structure of the debtor consisted of separate companies in the U.S. and the U.K. and were all owned by one individual and closely intertwined.74 For the purposes of this paper, it is sufficient to know that the SIPA trustee in the U.S. was recognized as a foreign representative in the U.K. and the SIPA proceeding was recognized as a foreign main proceeding.

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Justice J.M. Farley,The International Scene: A Judicial Perspective on International Cooperation in Insolvency Cases, 17-2 ABIJ 12, March 1998. 71 Dargan, supra note 64 at 121. 72 Michael Fitz- James, Use of cross-border insolvency protocols on the rise, Corporate Legal Times International, May 2002, online: http://www.gtlaw.com/portalresource/lookup/wosid/contentpilot-core-16025190/pdfCopy.name=/leshawj02a.pdf. (Last visited on August 9, 2013) 73 Dargan, supra note 64 at122 - 123. 74 Section 10 of the Madoff Cross-Border protocol, Exhibit A Insolvency Protocol (hereinafter Madoff Protocol) and order, online: http://www.iiiglobal.org/component/jdownloads/viewdownload/573/4344.html. (Last visited on August 8, 2013)

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Correspondingly the U.K. joint liquidators were granted recognition in the U.S. This protocol specifically lays out the reason for which there was a necessity to enter into such a protocol.75 The main objectives that this protocol sought to achieve were better communication, information sharing, efficiency, coordination, comity and equal access for the insolvency representatives of the other country. 76 For communication and information sharing between the parties, a more generally applicable information agreement was entered into between the parties.77 Significantly the ALI Guidelines were formally adopted by both courts.78 4.7

The Lehman Protocol

The Lehman Brothers (“Lehman”) 79 bankruptcy filing is the largest and probably most complex international bankruptcy case in history. It not only caused twenty two additional Lehman affiliates to subsequently file for Chapter 11 petitions in New York, but also gave rise to seventy five distinct proceedings across the world.80 The Lehman Holding Company was incorporated in the U.S. with subsidiaries in various countries. Because of its integrated cash management system, illusory intra- company debts, intra- company guarantees to third parties and cross- collateralization, Lehman's creditors were not limited to the assets of single subsidiaries.81Judge Peck, who was presiding over the proceedings in the US, issued an order in the early days of filing, that allowed operations to continue with the cash- management system that was existing before the filing of the petition. However, since multiple foreign main proceedings were filed by the various subsidiaries, including, Lehman Brothers International Europe LBIE), which controlled most of Lehman's European assets, the various Lehman entities entered into negotiations for a protocol.82 The protocol expressed its goals as minimizing costs and maximizing recoveries for all parties involved, and managing all individual cases effectively with consistent results. It sought to achieve this through 75

Id at Recital C. Id at sections 1,2 and 3. 77 Section 10 of the Madoff Cross-Border protocol, Exhibit B Information Sharing Protocol, online: http://www.iiiglobal.org/component/jdownloads/viewdownload/573/4344.html. (Last visited on August 7, 2013) 78 Supra note 74 at S. 5. 79 In re Lehman Bros. Holdings Inc., No. 08-13555 (Bankr. S.D.N.Y. filed Sept. 15, 2008). 80 Supra note 42 at 1302. 81 Sexton, supra note 28 at 834. 82 Sexton, supra note 28 at 834-835. 76

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international coordination and coordination of proceedings, communication among all official representative and committees, among committees, among tribunals and between courts, information and data sharing, asset preservation, an efficient and transparent claims process, maximization of recoveries, and comity.83 It also addresses the issue of notice by requiring for notice to be given to all parties through email thus following the model law provision of equality of treatment to all. It also provides for the rights of official representatives and creditors to appear before any proceeding but without subjecting to the jurisdiction of the tribunal governing the proceeding.84 The Protocol included provisions that limited the scope and targets of avoidance actions and intra-company claims which led Lehman Brothers International Europe (LBIE) and Lehman Brothers Japan (LBJ) to refuse to sign the protocol.85 However this did not invalidate the protocol since this protocol was only meant to improve cooperation and not to create binding obligations on the parties. 5.

Role of Courts and judges

The case studies in Section 4 of this paper show that courts and judges play an important role in the effectiveness of protocols. Exhibiting judicial creativity at its best, Judge Tina Brozman in Maxwell appointed an examiner to engage with the U.K. administrators which ultimately resulted in the first major insolvency protocol. For a protocol to be successful, cooperation between courts is crucial. In Maxwell, a spirit of mutual trust and dignity is expressed by the judges on both sides which is apparent in their respective judgments. The protocol itself expresses a practical and equitable approach informing the two judges.86 In both Maxwell and Nakash, the debtor in question did not sign the protocol. In Nakash, the debtor even strongly opposed the approval of the protocol.87 In Lehman, Lehman Brothers International Europe (LBIE) and

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Altman, supra note 12 at 479 – 480. Altman, supra note 12 at 481-482. 85 Sexton, supra note 28 at 834. 86 B. Wessels, International Insolvency Law, Vol. X, 10027, online: http://books.google.com/books?id=eD3NOkuWBuEC&pg=PA18&lpg=PA18&dq=hoffma n+and+brozman+cooperation&source=bl&ots=AxSHMge_gZ&sig=iDtKDx5svImhIDkI6n vqprZgVVc&hl=en&sa=X&ei=RFqLT8SeIuj50gGSxazuCQ&ved=0CDwQ6AEwBA#v=o nepage&q=hoffman%20and%20brozman%20cooperation&f=false (Last visited on August 8, 2013) 87 Justice J.M. Farley, supra note 70.. 84

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Lehman Brothers Japan (LBJ) initially refused to sign the protocol.88 This is not to say that initiatives cannot come through the parties but it is obvious that cooperation between the courts is essential in these cases. This is even more pronounced in the U.S. - Canada cases where there were joint hearings whether telephonic or through video conferencing. The Nakash case where an insolvency protocol was entered into between courts in a common law country and a civil law country also emphasises that the proactive role a judge must take in the process of adopting an insolvency protocol.' 6.

Role of parties

Parties may also agree to enter into a protocol. The Madoff case is an example of a protocol entered into by the parties and then approved by the judge. In fact, some jurisdictions may allow the insolvency representatives to enter into an insolvency protocol without requiring subsequent court approval.89 This could be a useful tool in cases where courts in civil law countries find it hard to find the authority to enter into a cross-border insolvency protocol. However, even if protocols may be more effective when the parties agree to be bound by them, it is the courts’ willingness to cooperate and coordinate matters with each other and the parties that ultimately make them work as tools to effective resolution of cross-border insolvencies. Consider for example, courts acting of their own accord and issuing conflicting orders. Even if parties have an agreement to cooperate with each other, conflicting orders from different jurisdictions would lead to confusion, inefficiency and loss of value of the insolvent entity and thereby loss of value to creditors in all jurisdictions. 7.

Canada – U.S. Insolvency Protocols – The next level of cooperation?

Insolvency protocols have been used most in cases with proceedings in U.S. and Canada. Thus cooperation between U.S. and Canada has progressed to the extent of joint hearings being held through videoconferencing. 90 Considering the fact that insolvency protocols are being entered into by various countries, and considering the fact that 88

Sexton, supra note 28 at 834. UNCITRAL Practice guide, p. 36 http://www.uncitral.org/pdf/english/texts/insolven/Practice_Guide_english.pdf. visited on August 8, 2013) 90 David Lord supra note 26 at 13. 89

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improvements in technology are becoming more widespread than ever, it is very likely that in the future insolvency protocols providing for joint hearings through video conferencing and satellite television will be the norm. This might particularly be useful in future multinational insolvencies where proceedings in many jurisdictions are involved. 8.

Are cross-border insolvency protocols still relevant today?

The use of cross-border insolvency protocols in cases like Lehman and Madoff shows that they are still relevant today despite the adoption of the Model Law by some countries. While they have definitely evolved in form and purpose, from the Maxwell case, they are definitely still being used to effectively resolve cross-border insolvency cases. One reason for this could be the disparity in insolvency laws, in various jurisdictions, even if these laws essentially follow the Model Law. In fact, to reconcile the difference between the mechanism for determination of COMI between the U.S. and the EU laws, Susan Johnston and John Han, take the view that parties could determine the COMI through an insolvency protocol since a universal global solution seems very unlikely. 91 While this is an interesting suggestion, it could raise other concerns like encouraging parties to indulge in forum –shopping and also parties might not be able to agree on one particular COMI determination if their interests are conflicted. Further it might be seen as an attack on the sovereignty of nation states if parties can bypass national laws and agree to a COMI of their choice. Another reason for the use of insolvency protocols in cross-border cases could be where some or any of the jurisdictions involved might not have adopted the Model law. Further, multi-jurisdiction insolvencies involve too many countries, entities, parties in interest and courts. An insolvency protocol for equal access, better coordination and communication etc. would only make resolution of such proceedings more efficient. 9.

Conclusion

The use of cross-border insolvency protocols is likely to increase with increasing cross-border trade and corporate transactions that most often involve businesses owning assets and incurring liabilities in more than one jurisdiction.92

91 92

Susan Power Johnston and John Han, supra note 20 at 818. David Lord supra note 26 at 1.

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As is apparent from the discussion in this paper, insolvency protocols have been a creature of necessity and will continue to be so. In Maxwell, the protocol was a novel device used to overcome the conflict between U.S. and U.K. proceedings. In Lehman and Madoff, the protocols were adopted to ensure efficient communication, coordination and information sharing. Thus each protocol addresses the needs of the specific case which makes it a very attractive device in cross-border insolvency cases. If courts and judges continue to promote insolvency protocols with the same level of enthusiasm as seen in some of the cases discussed there, protocols could become the norm and parties may be able to enter into agreements with creditors about protocol provisions, ex-ante. This would make the insolvency proceedings less uncertain, thereby reducing concerns of creditors dealing with large multi-nation businesses. However it remains to be seen if courts will enforce such ex-ante contractual agreements as that would take away the flexibility to design protocols as per the needs of the case.

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