Research On Cross-border Insolvency Legal System

With the flourishing of transnational trade and investments come increasingcross-border insolvencies (“CBIs”). More and more enterprises in China are gettinginvolved into CBIs, both actively and passively. The Enterprise Bankruptcy Law(“EBL”) entry into force on1June2007was the initial response to the issue of CBIs interms of Chinese law. However, EBL merely touches upon the preliminary issue thatwhether the legal effect of insolvencies initiated by Chinese courts is recognized abroador vice versa. Many specific issues related to CBIs cannot be properly dealt with underexisting laws. As a result, CBIs emerge as a highlighted issue in respect of bankruptcylaw. This dissertation, in light of the legislative situation of and the real need for CBIs inChina, chooses to conduct a research from the theoretical perspective of legislation, inaim of solving problems in practice as well as making proposals to establish Chineselegal system of CBIs.The first step to carry out a research on CBIs from the theoretical perspective oflegislation is to clarify the institutional structure of CBIs. If we consider rules withidentical or similar functions as “a set of rules”, which or how many sets of rules arethere within the area of CBIs? This question has been seldom asked in previous research,let alone the answer is quite little and ambiguous. Given that, this dissertation managesto respond to that question at the outset. In terms of procedure, the key issues involvedin CBIs include:(1) whether the court of a certain country has jurisdiction over a CBIprocess;(2) what is the applicable law under the circumstance that the court does havecompetent jurisdiction;(3) whether the insolvency process initiated by the court of thatcountry can be given with recognition and assistance by other countries; and (4) whethercourts of or insolvency administrators from different countries may cooperate over onesame insolvency process, and how? These issues in fact set out the coverage of CBIs. Thus, in terms of institutional structure, there are four sets of rules in CBIs, namely therules of jurisdiction, the rules of application of law, the rules of recognition andassistance to foreign insolvency process and the rules of inter-state cooperation.The rules of jurisdiction bear two missions: the first is to determine the jurisdictionin CBIs; and the second is to provide solutions for potential jurisdictional conflicts. Thekey to determine the jurisdiction is to determine the appropriate connecting point ofjurisdiction. The selection of connecting points has gone through a historicalevolvement, from single point to multiple points, from rigidness to flexibility, and alsofrom the emphasis of form to the focus on substance. In addition, the selection ofconnecting points by a country may well reflect the extent of openness of CBI legalsystem of that country. Although the conflict of jurisdiction could be eradicated on onehand, or be mitigated on the other, the approach of eradication may not be taken within arelatively long period hereafter, since the conditions of taking that approach have yet tobe met, and we cannot expect to unitarily distribute jurisdiction at regional or evenglobal level. Therefore, the approach of mitigation is the realistic choice for us. Atpresent, mitigation could be achieved by two means: first, the trend of expanding ofjurisdiction must be restrained both legislatively and judicially; second, the cooperationand assistance among insolvency processes of different countries must be realized.COMI is a newly established rule of jurisdiction in CBIs, which has been stipulated inboth the Council Regulation(EC) No1346/2000(hereinafter referred to as the “EURegulation”) and the UNCITRAL Model Law on Cross-Border Insolvency(hereinafter referred to as the “Model Law”). Nevertheless, under the EU regulation,the rule of center of main interests, as a connecting point of jurisdiction, is leaningtowards the determination of the country with jurisdiction; while under the Model Law,the function of the rule of center of main interests is focused on resolving conflicts ofjurisdiction and coordinating insolvency processes initiated by multiple countries.Views concerning the application of law in CBIs divide into two theoretical schools,i.e. the school of unitarianism and the school of differentiation. In the view of the former, the laws of the initiation country should be applied unitarily in CBIs; however the latterargues that different governing laws should be applied to different issues of CBIs. Theschool of differentiation has gradually occupied the advantage over the school ofunitarianism. The core of the school of differentiation lies on the distinction betweenconflicts in CBIs and the differences of governing laws thereof, so it matters the meansof differentiation. Nonetheless, the means of differentiation are in disorder to someextent. The proper means of differentiation should be based on the impact andadjustment put upon legal relations by insolvency process.Though it is very important to resolve conflicts of jurisdiction or application of lawfor the progress of CBIs, it is often the case that more need to be done. In particular, therecognition and assistance given by courts of other countries and internationalcooperation over specific issues are usually demanded.The request of recognition by qualified parties is the premise of the recognition offoreign insolvency process. As for the distribution of the right of such requests, relevantprovisions of the Model Law worth learning from, which prescribe that foreigninsolvency administrators, rather than creditors home and abroad should be bestowedwith the right of recognition request. Upon the request by foreign insolvencyadministrators, the court of a certain country which has received such request shouldcarry out a necessary review. However, the legislation should explicitly set out, to amodest extent, which factors should be examined in such reviews and under whatconditions the decision of recognition should be made. One circumstance which shouldbe avoided is that CBIs barely get recognized under domestic reviews because theconditions of recognition are too rigid to be met. In general, the recognition of foreigninsolvency process is combined with the assistance to such process. The recognitionaims to the acceptance of the requested country, while the assistance aims to makeforeign insolvency process get necessary remedies in the requested country. The ModelLaw establishes a composite remedy system covering the temporary remedy prior torecognition, the automatic remedy for foreign main insolvency process, and the due remedy following the recognition of foreign main insolvency process or non-maininsolvency process. This composite remedy system provides strong guarantee for thesmooth progress of CBIs.International cooperation of CBIs could be viewed in both a broad and a narrowsense. In a broad sense, international cooperation of CBIs may cover the settlement ofconflicts of jurisdiction, the recognition of and the assistance to foreign insolvencyprocess, and the coordination between multiple concurrent insolvency processes. Inorder to clarify the legal institution of CBIs, this dissertation takes position of the narrowsense in respect of international cooperation. In a narrow sense, the heart ofinternational cooperation lies with the coordination between multiple insolvencyprocesses attributable to one debtor, including the coordination between domestic andforeign processes and the coordination among several foreign processes requesting forrecognition. For the sake of international cooperation, the legislation should make clearand guarantee that foreign insolvency administrators and creditors can have theopportunity to participate in domestic insolvency process, and also guarantee that alinkage should be built up effectively between insolvency administrators and courts ofcountries that get involved in CBIs.The existing provisions of CBIs in Chinese laws are still of many loopholes andtherefore yet to be matured. In the future, a specific section stipulating CBIs should beadded into EBL by amendments, while nowadays relevant rules could be set out throughjudicial interpretation. For furthering the research and providing references for possiblejudicial interpretation, this dissertation in the end puts forward several legislativesuggestions in detail and formulates a number of draft articles.