Academic journal article Texas International Law Journal

The Payment of Priority Claims in Cross-Border Insolvency Cases

Academic journal article Texas International Law Journal

The Payment of Priority Claims in Cross-Border Insolvency Cases

Article excerpt

INTRODUCTION

The premise of this symposium is, as Lord Hoffmann has stated so well, that

fairness between creditors requires that, ideally, bankruptcy proceedings should have universal application. There should be a single bankruptcy in which all creditors are entitled and required to prove. No one should have an advantage because he happens to live in a jurisdiction where more of the assets or fewer of the creditors are situated.1

Lord Hoffmann spoke of fairness between creditors. Beyond fairness, the goal of preserving the integrity of a multinational enterprise for the benefit of all stakeholders, by a reorganization or a sale as a going concern, is materially facilitated if there is a centralized proceeding, under the control of one administrator or one debtor in possession, rather than a multiplicity of separate, competing proceedings that usually lead to a liquidation or to a significant loss of value.

The problem, as posed by this symposium's organizers, is that each court with jurisdiction over the insolvency proceedings of a multinational enterprise

must decide what system of priority to apply as to specific assets and creditors found in the various countries involved. Because these systems vary greatly from country to country, a court may be required to choose between its own domestic system of priorities and that of another jurisdiction. Such a choice may have great consequences for the litigants and for progress toward a system of international coordination.2

It is the premise of this paper that if a single court is to take control of the foreign assets of an enterprise and avoid the opening of secondary proceedings, it will ordinarily have to provide for the payment of priority claims, both domestic and foreign. In short, in a cross-border case, particularly one where there is the possibility of reorganization or sale as a going concern, priority claims will have to be paid. The further question dealt with herein is whether an adequate statutory basis exists permitting such relief in the United States, the only jurisdiction about which I am qualified to write.

I. DOMESTIC SYSTEM OF PRIORITIES

To begin the analysis, it is necessary to clarify what is meant by a "domestic system of priorities." This paper will use the term "priority" in the sense it is usually understood in the United States, that is, an unsecured claim entitled to be paid prior to other unsecured claims. Our statutory priorities are set out in § 507 of the Bankruptcy Code and include the expenses of administration of the proceeding itself; limited claims of employees; certain taxes; and such other claims that Congress has deemed sufficiently meritorious to have preferential rights to payment.3 This paper does not include secured creditors- those creditors who have a security interest in collateral- in the following analysis because there is not a variation in the rights of secured creditors in different jurisdictions to the same degree as the treatment of priority claims. For example, virtually all insolvency regimes purport to respect the rights of secured creditors over their collateral. There are unquestionably significant differences in the procedural impact of an insolvency filing on the rights of secured creditors- some systems, such as the United States, will stay the secured creditor from realizing on its collateral for relatively long periods, while others may not interpose any stay of the right of the secured creditor to foreclose. There may also be differences in the willingness of an insolvency regime to impose certain costs on the secured creditor, such as the costs of administration of the proceeding, or to elevate certain types of claims, such as the claims of employees, over the lien of a secured creditor.

These regimes nevertheless purport to grant the secured creditor the essential benefit of its bargain as to rights in collateral. In principle, it should not be difficult for a court in the United States to enforce a foreign security interest or for a foreign court to enforce a security interest created in the United States. …

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