RECENT MOVEMENTS TOWARD bankruptcy law reform in the United States, Germany, France, and many other countries were intensified by the poor economic conditions of the late 1980s and early 1990s, including the 1987 crash of numerous stock markets around the globe and the subsequent worldwide economic slump. In Australia, the insolvency rate doubled between 1989 and 1990; in the United States, nearly 850,000 corporate and personal bankruptcies were filed in 1994, more than double the 340,000 filed in 1984. In this age of multinational conglomerates and with world trade expanding in the wake of numerous monumental trade agreements, countries need to consider how they will deal with cross-border insolvencies. Without international agreements in place, great tension will inevitably arise when dealing with cross-border bankruptcies, especially because courts, which have considerable latitude in these issues, often have the interests of their nationals foremost. Current procedures for dealing with international bankruptcies are drastically inadequate and in need of reform. World leaders must recognize the central role that multinational corporations play in the global economy; they need to embrace universalism, the concept that a court's rulings could extend beyond its boundaries. Thus, the socially optimal approach to dealing with bankruptcies can be entitled "the enterprise and forum philosophy,"--tempering faith in markets with an evaluation of policy effects on many interests.
Many of the current difficulties that arise between nations in the midst of a cross-border insolvency case stem from distinct differences between the way countries handle bankruptcies internally. Most nations' bankruptcy laws were developed simply by modifying previous laws to fit current needs, resulting in a complicated and disjointed system of procedures difficult for all parties involved.
In the United States, bankruptcy law evolved from federal railroad receivership. In England, every time a problem has arisen, Parliament has made modifications without ever conducting a sweeping overhaul of bankruptcy law. This system has become so complicated that foreign lawyers find it almost incomprehensible, and even British lawyers who do not specialize in bankruptcy law have difficulty with insolvency proceedings. In Germany, some of the most prominent insolvency practitioners lobbied hard against a comprehensive bankruptcy reform bill in 1993 and forced passage of a more pragmatic version that essentially patched up the flaws in the old system.
Furthermore, in many nations such as Argentina and Israel, local districts have primary jurisdiction over bankruptcies. In these countries, local district courts (instead of national courts as in England, Canada, and Australia) have primary control over bankruptcy procedure enforcement, leading to a confusing array of precedents.
Despite all these differences, there is still some common ground between the bankruptcy proceedings of developed nations. Most systems are founded upon the principle of "stratification" which holds that some creditors' claims take precedence over others. Additionally, laws tend to protect secured creditors' claims to the extent that their security is still dispensable. Most significantly, almost every industrialized country now has two alternative bankruptcy procedures available: liquidation and reorganization. During a state-supervised liquidation, the bankrupt company is sold as a whole or in pieces to the highest bidders, and creditors are repaid from the proceeds of this auction. In 1938, the United States became the first free-market country to adopt procedures for restructuring as well as liquidation by introducing Title 11 of the US Tax Code Sections 1101-1174 (Chapter 11), which allows managers and creditors to negotiate plans for rehabilitating insolvent enterprises. However, the advent of reorganization as an alternative for dealing with bankruptcy worldwide has introduced another point of contention between nations. …