Transnational financial insolvency

07/ 06/ 2018

The lack of financial transparency and the possibility of evading fulfillment of obligations by using asset allocation schemes in different jurisdictions is actively discussed, both in the EU and in the United States. And at a time when the society was actively discussing scandals related to the disclosure of offshore zones, the adoption of the BEPS plan and disclosure of bank secrecy, in a number of EU countries, as well as some low-tax countries, legislation was promulgated that promised to radically change the relationship between creditors and debtors. Until recently, the bankruptcy procedure was perceived as a way of legal restructuring or liquidation of a company within one state. The UNCITRAL Model Law served as the basis for the bankruptcy procedure, after which a more modern set of rules for the selection of applicable law in bankruptcy cases was developed - Global Rules on Conflict-of-Laws Matters in International Insolvency Cases, published in the Supplement to the American Law Institute / International Insolvency Institute Global Principles for Cooperation in International Insolvency Cases ». However, despite the availability of conditions for carrying out transnational bankruptcy, the states used mostly domestic laws. Transnational bankruptcy To date, there is no single term denoting transnational bankruptcy. Most of the EU and US countries use two terms - transnational financial insolvency and transnational bankruptcy. Under transnational financial insolvency is understood the procedure of bankruptcy of a legal entity regardless of form. The term transnational bankruptcy is used to determine the bankruptcy of a natural person, incl. and the entrepreneur. Most of the national legislation of the EU countries, including the UK, is not aimed at eliminating enterprises, but on restructure them while preserving jobs. However, a number of high-profile processes related to the bankruptcy of large multinational firms accompanied the introduction of changes and simplification of interaction between creditors, arbitration managers and courts in various countries. The most radical changes in legislation were held by such countries as Panama, Bermuda, Singapore, United Kingdom, United Arab Emirates, Switzerland, Belize. The assets located in the Cayman Islands also became more transparent. In addition, the United States formulated an unambiguous practice concerning the bankruptcy of individuals, providing for the return of assets that the person had for a year before declaring himself bankrupt, regardless of how exactly the bankrupt lost these assets (donation, sale, transfer to trust or any other method). Transnational status Before moving on to a detailed review of the changes that have been made in some countries, it is worth considering the conditions under which your bankruptcy can become a transnational status. The issue of transnationality becomes relevant if the debtors property is located in more than one jurisdiction, creditors are located in more than one country or directly the debtor carries out economic activities in two or more countries. In this regard, the European legislation has emerged and is actively used such concepts as the place of the main activity and the place of the main management. These two terms are able to transfer your bankruptcy procedure from one state to another, which is sometimes very relevant, given the sanctions that are imposed on the owners of bankrupt enterprises. It is also worth noting that the bankruptcy procedure against your company in some EU countries can be initiated even in the absence of direct debts to creditors. For example, the legislation of the Federal Republic of Germany provides for the possibility for creditors to apply to the court for a possible bankruptcy of the enterprise before the immediate financial insolvency on the basis of a substantial reduction in the cost of assets or the loss of such assets. Practice shows that the initiation of bankruptcy proceedings against an enterprise in Ukraine, whose corporate rights the enterprise owns in Germany, can be treated as a general insolvency of the group, as a result of which inspections will begin and a similar procedure may be initiated by your counterparties in Germany. Panama In accordance with the Insolvency Law, a foreign court or representative may seek assistance from the Republic of Panama for foreign affairs. In turn, the Panamanian court can seek assistance from a foreign state with regard to forthcoming actions in accordance with the Law on Insolvency. He acknowledges that insolvency proceedings can occur simultaneously in Panama and in foreign jurisdictions. The insolvency law also allows foreign creditors or interested parties to file insolvency applications in Panama. The law grants foreign creditors equal rights as local creditors in relation to the filing of cases in Panama, which allows foreign creditors to appear in such proceedings without prejudice to any applicable seniority rights. As in most litigations, the filing of applications in Panama must comply with certain formal and documentary requirements, including a court order of a foreign court opening insolvency, appointment of a representative, and translation and authentication in Spanish. The law criminalized bankruptcy and included new provisions on fraud in bankruptcy, but the responsibility for those who try to prevent a crime or help to find and return property has been relaxed. Such provisions facilitate the conduct of international business, allowing foreign creditors and insolvency representatives to gain access to asset recovery and retention instruments available in accordance with the internal provisions of the Insolvency Law. Great Britain The courts of England and Wales use a universal approach and provide that the companys assets placed abroad are completely under the control of the local director (board of directors) and ensure the interests of all creditors regardless of their location. A similar practice is also used by the courts of Belize. However, the most interesting and important is the change of judicial practice on the issues of removing the corporate veil. Before proceeding to the analysis of innovations in judicial practice, it is worth noting that in the UK, extrajudicial procedures for recognizing financial insolvency are widespread, the main purpose of which is restructuring within the company and approval of a plan for phased settlement with creditors. So, until recently, the courts of England did not identify the beneficiary of the company with the property and debts of the latter. Nevertheless, recently the courts have seriously changed their point of view. Now the practice goes the way that in cases against the owner of the company (personal bankruptcy, divorce proceedings) the property over which the owner actually exercises control is the same property as if it belonged directly to him (and not to the company he manages ). The law of England also does not have strict sanctions against business owners who went through bankruptcy proceedings, which in turn makes bankruptcy in this jurisdiction more attractive than in other EU countries. So, in the event that the debtor proves that during the last time he was managing the firm (or received income for bankruptcies of individuals) in England, the consideration can be transferred from other jurisdictions by the place of primary interest or the place of the main administration. Switzerland On March 16, 2018, the Swiss parliament approved the revision of the Swiss rules of international bankruptcy law in the Law on Private International Law. Since the inception in 1989, these rules have been considered a modern tool to combat the recognition of foreign bankruptcy and insolvency solutions with their legal consequences in Switzerland. However, taking into account international events, the rules were too cumbersome. The current revision simplifies recognition and relevant local hearings, and also repeals the two former recognition requirements, facilitating the receipt of recognition for foreign bankruptcy orders in Switzerland. So, it is no longer required that the relevant foreign state grant reciprocity to Switzerlands bankruptcy decrees. The decree on bankruptcy of foreigners should no longer be issued at the place of residence or place of the debtor; it may also be issued at the center of the principal interest of the latter, provided that the place of residence or place of the debtor was not located in Switzerland at the time of the opening of the foreign proceeding. According to the current legislation, the recognition of a foreign bankruptcy decree always causes the opening of subsidiary (or mini) bankruptcy procedures in Switzerland over the local assets of the debtor. Such proceedings are designed to provide preferential payments to secured creditors and privileged Swiss creditors from assets located in Switzerland. However, in most foreign bankruptcies there are no such secured or privileged creditors. Rather, recognition is required only because the assets of the debtor are in Switzerland (mainly Swiss bank accounts). According to the revised law, the opening of subsidiary bankruptcy procedures in Switzerland will not always be necessary. At the request of a foreign bankruptcy administrator, mini-bankruptcy does not open if none of the secured or privileged Swiss creditors has declared any claims, and if the Swiss court finds that the claims of ordinary Swiss creditors have been duly taken into account in foreign proceedings. If the mini-bankruptcy does not open, the trustee for foreign bankruptcy has the right to transfer assets from Switzerland and conduct litigation in Switzerland, but he is not allowed to make court decisions. European account We will cite a number of other interesting changes that took effect or were recently adopted. Thus, according to the law of Cyprus, within 20 years after the company is declared bankrupt and the trial is over, if the companys lost assets are found, the bankruptcy case can be renewed in order to satisfy the creditor claims as much as possible. In addition, on 18.01.2017, most of the EU countries have joined Regulation 655/2014 of May 15, 2014, which regulates the preservation of the European account (hereinafter referred to as the EА) to help collect debts in civil and commercial matters. The resolution allows creditors to keep the amount that is in the bank accounts of the debtor located in any participating EU member state through a single application to the EА before the national court. In such a statement, the creditor can apply to the court with a request to obtain the necessary information to identify the banks in which the debtor has an account. Participating EU states do not include Great Britain and Denmark. Accordingly, the courts of Great Britain and Denmark can not provide EHR and bank accounts in the UK, and Denmark can not participate. In addition, the possibility of obtaining an EА in accordance with the Regulations is limited to creditors residing in the participating EU member states and is therefore not open to creditors residing in the UK, Denmark and non-EU countries. Finally, we note that Ukraine is not lagging behind this process. Thus, the new draft Code of Ukraine on bankruptcy procedures provides for a whole section on the conduct of bankruptcy procedures related to a foreign bankruptcy procedure.

And at a time when the society was actively discussing scandals related to the disclosure of offshore zones, the adoption of the BEPS plan and disclosure of bank secrecy, in a number of EU countries, as well as some low-tax countries, legislation was promulgated that promised to radically change the relationship between creditors and debtors.

Until recently, the bankruptcy procedure was perceived as a way of legal restructuring or liquidation of a company within one state.

The UNCITRAL Model Law served as the basis for the bankruptcy procedure, after which a more modern set of rules for the selection of applicable law in bankruptcy cases was developed – “Global Rules on Conflict-of-Laws Matters in International Insolvency Cases”, published in the Supplement to the American Law Institute / International Insolvency Institute Global Principles for Cooperation in International Insolvency Cases ».

However, despite the availability of conditions for carrying out transnational bankruptcy, the states used mostly domestic laws.

Transnational bankruptcy

To date, there is no single term denoting “transnational bankruptcy.” Most of the EU and US countries use two terms – “transnational financial insolvency” and “transnational bankruptcy”.

Under transnational financial insolvency is understood the procedure of bankruptcy of a legal entity regardless of form. The term “transnational bankruptcy” is used to determine the bankruptcy of a natural person, incl. and the entrepreneur.

Most of the national legislation of the EU countries, including the UK, is not aimed at eliminating enterprises, but on restructure them while preserving jobs. However, a number of high-profile processes related to the bankruptcy of large multinational firms accompanied the introduction of changes and simplification of interaction between creditors, arbitration managers and courts in various countries.

The most radical changes in legislation were held by such countries as Panama, Bermuda, Singapore, United Kingdom, United Arab Emirates, Switzerland, Belize. The assets located in the Cayman Islands also became more transparent.

In addition, the United States formulated an unambiguous practice concerning the bankruptcy of individuals, providing for the return of assets that the person had for a year before declaring himself bankrupt, regardless of how exactly the bankrupt lost these assets (donation, sale, transfer to trust or any other method).

Transnational status

Before moving on to a detailed review of the changes that have been made in some countries, it is worth considering the conditions under which your bankruptcy can become a transnational status.

The issue of transnationality becomes relevant if the debtor’s property is located in more than one jurisdiction, creditors are located in more than one country or directly the debtor carries out economic activities in two or more countries.

In this regard, the European legislation has emerged and is actively used such concepts as “the place of the main activity” and “the place of the main management.”

These two terms are able to transfer your bankruptcy procedure from one state to another, which is sometimes very relevant, given the sanctions that are imposed on the owners of bankrupt enterprises.

It is also worth noting that the bankruptcy procedure against your company in some EU countries can be initiated even in the absence of direct debts to creditors.

For example, the legislation of the Federal Republic of Germany provides for the possibility for creditors to apply to the court for a possible bankruptcy of the enterprise before the immediate financial insolvency on the basis of a substantial reduction in the cost of assets or the loss of such assets.

Practice shows that the initiation of bankruptcy proceedings against an enterprise in Ukraine, whose corporate rights the enterprise owns in Germany, can be treated as a general insolvency of the group, as a result of which inspections will begin and a similar procedure may be initiated by your counterparties in Germany.

Panama

In accordance with the Insolvency Law, a foreign court or representative may seek assistance from the Republic of Panama for foreign affairs.

In turn, the Panamanian court can seek assistance from a foreign state with regard to forthcoming actions in accordance with the Law on Insolvency. He acknowledges that insolvency proceedings can occur simultaneously in Panama and in foreign jurisdictions.

The insolvency law also allows foreign creditors or interested parties to file insolvency applications in Panama.

The law grants foreign creditors equal rights as local creditors in relation to the filing of cases in Panama, which allows foreign creditors to appear in such proceedings without prejudice to any applicable seniority rights.

As in most litigations, the filing of applications in Panama must comply with certain formal and documentary requirements, including a court order of a foreign court opening insolvency, appointment of a representative, and translation and authentication in Spanish.

The law criminalized bankruptcy and included new provisions on fraud in bankruptcy, but the responsibility for those who try to prevent a crime or help to find and return property has been relaxed. Such provisions facilitate the conduct of international business, allowing foreign creditors and insolvency representatives to gain access to asset recovery and retention instruments available in accordance with the internal provisions of the Insolvency Law.

Great Britain The

courts of England and Wales use a universal approach and provide that the company’s assets placed abroad are completely under the control of the local director (board of directors) and ensure the interests of all creditors regardless of their location.

A similar practice is also used by the courts of Belize. However, the most interesting and important is the change of judicial practice on the issues of “removing the corporate veil”.

Before proceeding to the analysis of innovations in judicial practice, it is worth noting that in the UK, extrajudicial procedures for recognizing financial insolvency are widespread, the main purpose of which is restructuring within the company and approval of a plan for phased settlement with creditors.

So, until recently, the courts of England did not identify the beneficiary of the company with the property and debts of the latter. Nevertheless, recently the courts have seriously changed their point of view.

Now the practice goes the way that in cases against the owner of the company (personal bankruptcy, divorce proceedings) the property over which the owner actually exercises control is the same property as if it belonged directly to him (and not to the company he manages ).

The law of England also does not have strict sanctions against business owners who went through bankruptcy proceedings, which in turn makes bankruptcy in this jurisdiction more attractive than in other EU countries. So, in the event that the debtor proves that during the last time he was managing the firm (or received income for bankruptcies of individuals) in England, the consideration can be transferred from other jurisdictions by the “place of primary interest” or “the place of the main administration”.

Switzerland

On March 16, 2018, the Swiss parliament approved the revision of the Swiss rules of international bankruptcy law in the Law on Private International Law.

Since the inception in 1989, these rules have been considered a modern tool to combat the recognition of foreign bankruptcy and insolvency solutions with their legal consequences in Switzerland. However, taking into account international events, the rules were too cumbersome.

The current revision simplifies recognition and relevant local hearings, and also repeals the two former recognition requirements, facilitating the receipt of recognition for foreign bankruptcy orders in Switzerland.

So, it is no longer required that the relevant foreign state grant reciprocity to Switzerland’s bankruptcy decrees. The decree on bankruptcy of foreigners should no longer be issued at the place of residence or place of the debtor; it may also be issued at the center of the principal interest of the latter, provided that the place of residence or place of the debtor was not located in Switzerland at the time of the opening of the foreign proceeding.

According to the current legislation, the recognition of a foreign bankruptcy decree always causes the opening of subsidiary (or “mini”) bankruptcy procedures in Switzerland over the local assets of the debtor.

Such proceedings are designed to provide preferential payments to secured creditors and privileged Swiss creditors from assets located in Switzerland.

However, in most foreign bankruptcies there are no such secured or privileged creditors. Rather, recognition is required only because the assets of the debtor are in Switzerland (mainly Swiss bank accounts).

According to the revised law, the opening of subsidiary bankruptcy procedures in Switzerland will not always be necessary.

At the request of a foreign bankruptcy administrator, “mini-bankruptcy” does not open if none of the secured or privileged Swiss creditors has declared any claims, and if the Swiss court finds that the claims of ordinary Swiss creditors have been duly taken into account in foreign proceedings.

If the “mini-bankruptcy” does not open, the trustee for foreign bankruptcy has the right to transfer assets from Switzerland and conduct litigation in Switzerland, but he is not allowed to make court decisions.

European account

We will cite a number of other interesting changes that took effect or were recently adopted.

Thus, according to the law of Cyprus, within 20 years after the company is declared bankrupt and the trial is over, if the company’s lost assets are found, the bankruptcy case can be renewed in order to satisfy the creditor claims as much as possible.

In addition, on 18.01.2017, most of the EU countries have joined Regulation 655/2014 of May 15, 2014, which regulates the preservation of the European account (hereinafter referred to as “the EА”) to help collect debts in civil and commercial matters.

The resolution allows creditors to keep the amount that is in the bank accounts of the debtor located in any participating EU member state through a single application to the EА before the national court. In such a statement, the creditor can apply to the court with a request to obtain the necessary information to identify the banks in which the debtor has an account.

Participating EU states do not include Great Britain and Denmark. Accordingly, the courts of Great Britain and Denmark can not provide EHR and bank accounts in the UK, and Denmark can not participate.

In addition, the possibility of obtaining an EА in accordance with the Regulations is limited to creditors residing in the participating EU member states and is therefore not open to creditors residing in the UK, Denmark and non-EU countries.

Finally, we note that Ukraine is not lagging behind this process. Thus, the new draft Code of Ukraine on bankruptcy procedures provides for a whole section on the conduct of bankruptcy procedures related to a foreign bankruptcy procedure.