Will Coronavirus help or hinder cross-border insolvency?

Will Coronavirus help or hinder cross-border insolvency?

April 8, 2020

International co-operation in the coronavirus crisis

Globalisation has been with us for decades, bringing new and troubling dimensions to even relatively small insolvency cases and for the insolvency practitioners handling them. Suddenly, they were dealing with UK businesses with assets abroad and all manner of creditors and stakeholders in wild and wonderful places, all with no status or powers in the countries where they needed to be taking action.

Insolvency cross-border co-operation

INSOL International, the umbrella organisation for insolvency professionals was set up in 1982 to promote cross-border co-operation. The UNCITRAL Model Law on Cross-Border Insolvency followed in 1997, giving a standard framework to encourage co-operation and co-ordination between jurisdictions. This doesn’t attempt the Mission Impossible of unifying substantive insolvency laws around the globe; instead it aims to respect the differences between the relevant legal systems and the laws of different countries.

Gradually, some major countries have enacted their versions of this framework, now by 23 nations in all including the UK with its Cross-Border Insolvency Regulations 2006 and the US with its Chapter 15 procedure. Underlying the legislative razzmatazz, its courts and lawyers who make this work. Some wonderfully far-sighted and sophisticated judges and senior advocates have worked wonders in stretching boundaries and tearing down barriers. Without their work, it’s inconceivable that mind-blowingly complex collapses such as Lehman Brothers or Nortel could have been handled in the broadly consensual way that provided at least some sense of insolvency law and order for their stakeholders.

The global economy and the importance of working together

The global economy and all local economies are facing their biggest ever shock, matching and now predicted to exceed even the Great Depression on the 1930s, when UK and USA foreign trade fell by 60% and 70% respectively from 1929 to 1932. Just two weeks into the UK’s lockdown, major retail and hospitality brands are filing for insolvency protection at an alarming rate. We can be sure that the contagion will very soon bring us much more significant multinational failures, possibly starting in the aviation industry. Cross-border insolvency co-operation is going to need to work like it never has before and as with every other aspect of the Coronavirus crisis, it’ll have to function at breakneck speed.

The challenges

This points directly to the key problem in achieving this. Gaining recognition in a foreign jurisdiction so that you can engage proactively with its insolvency system to recover and realise assets, negotiate with creditors or settle disputes almost always involves that country’s courts granting recognition and then enforcing it when necessary, which it very often is.

All well and good, but legal systems everywhere are crumbling in the face of social distancing rules, lockdown regulations and the sickness of staff, judges and advocates. The UK’s High Court has delayed the hearing of many petitions and applications for three months, whilst also severely restricting those matters which can still be brought before it. The health crisis in New York City has brought its courts to their knees, with all non-essential matters being put on hold in the middle of March, with no return to normality in sight.

If cross-border access is dependent on a non-functioning court process, which often requires the physical attendance of the foreign insolvency practitioner, what is the way forward as major and minor multinational cases multiply, possibly exponentially?

What does the future hold?

We saw a tantalising glimpse of the future in a Chapter 15 case in the US just days ago, when we had been warned by our local lawyers that a formal hearing would be required to progress our application in a complex case and that one of the UK Administrators might have to be present. But in a victory for pragmatism over process, our application has been granted without a hearing on the strength of the papers provided to the court in question.

Is this just a temporary expediency? Or is it a sign that cross-border insolvency co-operation will be one of the very many things in business, which will never be the same again after Coronavirus? We can only hope that it’s the latter.