The approach to cross-border insolvency matters differs across national borders and legal systems.
Underlying approaches to cross-border insolvency
There are two broad approaches that countries have adopted in designing laws and mechanisms to guide cross-border insolvency administrations: the universal approach and the territorial approach.
The universal approach assumes that one insolvency proceeding will be universally recognised by the jurisdictions in which the entity has assets or carries on business. All the assets of the insolvent company will be administered by the court or the administrator in, and possibly also according to, the law of the place of incorporation. All creditors seeking to claim in the winding up submit claims to that court or administrator. When assets of the insolvent company are located in foreign countries, the court has the power to apply for assistance from the courts of those countries.
A modified form of this approach is adopted when there is a primary proceeding in the place of incorporation with secondary or ancillary proceedings occurring in other jurisdictions where assets of the insolvent enterprise are located. The secondary administrator assists the primary administrator collecting assets and, after satisfying preferred creditors and other approved payments, remits the surplus to the primary administrators. This modified universal approach is reflected in part of Australia's current law (Corporations Act, section 601CL).
The territorial approach assumes that each country will have exclusive jurisdiction over the insolvency of a particular debtor and that separate proceedings for each country under that countries' laws will be undertaken. No recognition is given to proceedings in course or completed in other jurisdictions.
A major disadvantage of the territorial approach to cross-border insolvency is that separate insolvency proceedings may be undertaken in each jurisdiction where the debtor's assets are located with the cost of such proceedings being borne ultimately by creditors. The cost and time involved in numerous proceedings encourages inefficiencies and duplication. Debtors and creditors can take advantage of time delays and differing laws concerning voidable transactions and preferred creditors to minimise any loss resulting from the debtor's inability to pay all debts. The territorial approach to cross-border insolvencies is also reflected in part of Australia's current law (Corporations Act, Part 5.7).
There are several types of legal mechanisms that have been used to address cross-border matters, which vary in their degree of formality. They include legislation, common law doctrine, judicial cooperation and inter-governmental agreements. Often more than one of the mechanisms are combined.
An approach often used in common law-based countries is to enact legislation specifically dealing with recognition of foreign insolvency proceedings. The legislation allows (or requires) courts in the home jurisdiction to recognise certain foreign insolvency proceedings, and provide assistance to foreign courts conducting such proceedings.
In Australia, this approach has been adopted in both the Bankruptcy Act 1966 and the Corporations Act 2001. The provisions in these laws generally provide that Australian courts must act in aid of courts of prescribed foreign countries in matters of bankruptcy and insolvency and may act in aid of other countries. The countries prescribed include the Bailiwick of Jersey, Canada, Papua New Guinea, Malaysia, New Zealand, Singapore, Switzerland, the United Kingdom, and the United States of America.
Some countries have entered into conventions for dealing with cross-border insolvencies in member States. The European Union Regulation on Insolvency Proceedings, which came into effect on 31 May 2002, introduces improved arrangements for coping with cross-border insolvencies in the European Union. The American Law Institute's Transnational Insolvency Project has developed cooperative procedures for use in business insolvency cases involving companies with assets or creditors in more than one of the three North American Free Trade Agreement countries - the United States, Mexico, and Canada.
The current Australian framework
Notwithstanding the existence of some provisions in Australia's corporate and personal insolvency laws to tackle cross-border insolvency matters, they are quite skeletal. The provisions have been criticised because they contain elements of both the territorial and the universal approach. One commentator analysing the provisions in detail in 1998 concluded that Australian creditors and Australian insolvency administrators may face considerable difficulties 'because of the inadequacy and lack of clarity' in the provisions.10
As to non-statutory mechanisms, such as conventions, as mentioned above, Australia is not a party to any conventions along those lines, and is highly unlikely to be in a position to deal with its cross-border insolvency issues in that way.