Priority Conflicts as a Barrier to Cooperation in Multinational Insolvencies

Penn State International Law Review Volume 27 Number 3 Penn State International Law Review Article 18 5-1-2009 Priority Conflicts as a Barrier to Cooperation in Multinational Insolvencies Jay Lawrence Westbrook Follow this and additional works at: http://elibrary.law.psu.edu/psilr Part of the International Law Commons Recommended Citation Westbrook, Jay Lawrence (2009) "Priority Conflicts as a Barrier to Cooperation in Multinational Insolvencies," Penn State International Law Review: Vol. 27: No. 3, Article 18. Available at: http://elibrary.law.psu.edu/psilr/vol27/iss3/18 This Article is brought to you for free and open access by Penn State Law eLibrary. It has been accepted for inclusion in Penn State International Law Review by an authorized administrator of Penn State Law eLibrary. For more information, please contact . Priority Conflicts as a Barrier to Cooperation in Multinational Insolvencies Jay Lawrence Westbrook* Although we have made remarkable progress in the last decade in the management of multinational insolvencies, the fundamental anomaly remains: a global economic crisis must be managed by various national courts. Our judges must act like a team of surgeons, each of whom is able to treat only one part of the patient. This article discusses one of the most important difficulties that arise from that awkward system. I. THE PROBLEM OF PRIORITIES Although insolvency systems around the world share fundamental premises and purposes, there are many variations which present substantial obstacles to cooperation among courts in the insolvencies of multinational corporations. Among the most important of these differences are varying rules governing priorities (preferences) among creditors in the distribution of the value realized in insolvency proceedings, whether liquidation or reorganization. From a broad policy perspective, the differences are not crucial, yet each one represents a contentious result in a particular case because one party or another will be advantaged or disadvantaged. Meaningful cooperation among courts will often require that one or the other priority system prevails. The question is whether a court will feel so bound by the local system so as to prevent cooperation with a foreign court. This problem did not appear in the old-style territorialist approach to international insolvency. Each court grabbed the assets it could reach and distributed them according to local priority rules. Only when courts try to cooperate to maximize value and fairness in a multinational case does the problem of differing priorities arise. In recent years we have seen the general acceptance of "modified universalism"-a pragmatic, accommodating form of the universalist approach to insolvency that Benno C. Schmidt Chair of Business Law, The University of Texas School of Law. I am grateful to John Strohmeyer, and John Donaleski, both Texas '10, for research assistance on this paper. PENN STATE INTERNATIONAL LAW REVIEW [Vol. 27:3,4 seeks to promote cooperation between courts and to produce results as near as possible to the ideal of a single, global proceeding.1 This approach also permits a meaningful chance for a global reorganization of a business, thus avoiding the serious loss of value almost always associated with piecemeal liquidation. Yet the clash of priority systems presents a serious obstacle to the universalist project. 2 The differences in priority rules are numerous. 3 In some countries, for example, secured parties enjoy an absolute priority in the proceeds of their collateral, while in others certain creditors may come ahead of the secured party in the distribution of those proceeds. In the latter jurisdictions, those who trump the secured party will vary from the tax collector to the insolvency administrator to the general unsecured creditors. Many countries give their own taxes a special lien or general priority while refusing to distribute anything on account of another country's taxes. Virtually all systems give a priority to moneys owed to workers, but the entitlements protected and the nature and amount of employee preferences vary greatly. 4 These three types of partiessecured parties, tax authorities, and employees-are favored in most systems, but in differing ways and to differing degrees. These and other differences create a number of difficulties. The obvious one is distribution of proceeds. For example, if a division of a company is sold as a whole, including assets and operations in several countries, how shall the proceeds be allocated and distributed? But the problem goes beyond allocation in distributions. It extends to decisions about the management of the insolvency case. For example, suppose that a higher price can be obtained for the division as a whole, but one of the countries involved could realize more for its priority claimants by separately selling the assets in that country. Does that country's court have the power to cooperate in the maximization of value even if it results in a somewhat lower distribution for the creditors favored by local priorities? Note that nowadays the effect of applying local priority rules 1. See HIH Cas. & Gen. Ins. Ltd., [2008] UKHL 21, [2008] 1 W.L.R. 852, 1 6, available at: http://www.publications.parliament.uk/pa/ld/ldjudgmt.htm [hereinafter HIH]. The case is also known as "McGrath v. Riddell." 2. It should be noted that even the holdouts for territorialism in the academy admit that cooperation is important and cooperation of any kind leads quickly to the kinds of issues discussed in this paper. Lynn M. LoPucki, The Casefor Cooperative Territoriality in InternationalBankruptcy, 98 MICH. L. REv. 2216, 2218-20 (2000). 3. See generally Jay Lawrence Westbrook, Universal Participation in TransnationalBankruptcies, in MAKING COMMERCIAL LAW: ESSAYS IN HONOUR OF ROY GOODE 419 (Ross Cranston ed., 1997); Jay Lawrence Westbrook, Universal Priorities, 33 TEX. INT'L L.J. 27 (1998). 4. See generally Janis Sarra, An Investigation into Employee Wage and Pension Claims in Insolvency Proceedings Across Multiple Jurisdictions: Preliminary Observations, 16 NORTON J. BANKR. L. & PRAc. 835 (2007). 2009] PRIORITY CONFLICTS AS A BARRIER TO COOPERATION 871 will often not be a choice to benefit local creditors over foreigners. In almost all countries, foreigners are given equal treatment and modem communication means that many creditors, especially large multinational creditors, will file in all relevant proceedings. Thus the choice is not between local and foreign creditors but between local and foreign priority systems. The conflicts exist in both liquidation and reorganization cases, but are more subtle and more serious in the latter. The priority issue is most highly focused when the question is turnover of assets for administration and distribution by a foreign administrator. Under the Model Law on Cross-Border Insolvency, one proceeding is designated as the "main" proceeding for a company. 5 That d (...truncated)