Academic journal article Texas International Law Journal

Corporate Groups and Cross-Border Bankruptcy

Academic journal article Texas International Law Journal

Corporate Groups and Cross-Border Bankruptcy

Article excerpt

I. INTRODUCTION

The concept of the corporate group looms over commercial practice. On the one hand, it creates positive opportunities for ingenious and innovative expansion, but on the other, it often serves as a deeply complicating phenomenon in the legal resolution of commercial problems, ranging from the simplest to the most intricate. Generally speaking, "corporate group" is not a legal concept- one notable exception is the German Konzernrecht -but it is used extensively among practitioners. We are clearly talking about a group whose members consist of individual corporations and whose business activities are interlinked.

The logical conclusion that one corporation might be a shareholder in another corporation was well understood by the nineteenth century, and, while this was initially viewed with some suspicion,2 it has now been exploited to the full in major industrial countries.3 There are several ways in which two or more corporations can be associated through corporate mechanisms. The simplest model, where one corporation, A, owns shares in another, B, is described sometimes as a vertical association between corporations.

The vertical association described above might be extended where, for example, B owns shares in C and so on. A horizontal association may exist where corporations A and B each own shares in the other. This too might be extended where A and/or B own shares in C, which in turn owns shares in A and/or B. In addition to share ownership, an association of companies might be established through the mechanism of corporate director appointment: corporation A might be given powers by the constitution of corporation B to appoint one or more directors to the board of B and vice versa.

Associations of corporations may also be established by other non corporate mechanisms. The most obvious is by contract, although this is rarely the method by which the close relationship contemplated in this article is achieved. In contrast, when corporations A and B have the same or largely the same shareholders and directors, they are likely to create a close association." For insolvency lawyers, an important consideration lies, in the event of the insolvency of one or more of the corporations that are associated, whether the assets and liabilities of the companies may be pooled in the carrying out of the insolvency process.

One further preliminary issue should be mentioned. While it is most often the case that the members of the group are corporations in the legal sense- registered under statute and enjoying the status of separate legal personality- sometimes a member of the group is not a corporation. The term "firm" is sometimes used, often deliberately to obliterate the distinction between incorporated and unincorporated business entities. To lawyers, this distinction is often of considerable importance, but in the world of business practice or to other groups of professionals or scholars, like economists, this distinction may be of little significance.5 And increasingly in the world of bankruptcy scholarship and practice, this problem has been finessed in the bankruptcy systems of many countries by giving significance to the distinction between commercial and consumer debtors and minimizing the distinction between incorporated and unincorporated debtors. Even in the U.K., where the sanctity of the incorporated/unincorporated divide is of the highest order, the bankruptcy system is undermining that distinction by conferring on individuals and partnerships rescue regimes originally developed only for incorporated companies.6

In addition to the generic term of "firm," the European Union has shown a tendency to legislate for "undertakings,"7 further blurring the distinction between incorporated and unincorporated organizations. Also, the recently enacted EC Regulation on Insolvency Proceedings not only applies to "whether the debtor is a natural person or a legal person, a trader or an individual,"8 but also provides the basis for secondary liquidation proceedings to take place where the debtor has an "establishment," which is defined as "any place of operations where the debtor carries out a non-transitory economic activity with human means and goods. …

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