The International Year in Review

<p>It has been an eventful year for international insolvency as the trend toward economic globalization
continues to manifest itself very visibly in the international insolvency area. Less than a dozen years ago,
it was reasonably unusual to find reorganizations or insolvencies that had significant international
connections. But now, it is unusual to find a major case that does not have significant international aspects,
and this trend is certain to accelerate.

</p><p>This article looks at some of the significant developments over the past year that have impacted the
international insolvency area. The UNCITRAL Model Law on Cross-border Insolvency was adopted in
Mexico (as described in The International Scene column in the September 2000 issue) and shows signs
of moving toward adoption in England as well as a number of other countries. The acceptance of modern
technology has led to several joint cross-border hearings between courts in different countries (primarily
the United States and Canada) through the use of satellite television facilities, which would not have
happened even a very short time ago. Bankruptcy courts have tended to continue their developing
cooperation with courts in other countries in multinational and cross-border cases. This article focuses on
only a few of the major developments in the international insolvency area in the last several months and
describes current initiatives that are likely to proceed and evolve as we proceed into 2001.

</p><h3>The European Union Insolvency Regulation</h3>

<p>Readers of The International Scene will recall that European aspirations for a European insolvency
convention foundered in 1996. Cynical observers have always considered that the prospective convention
was actually a victim of "Mad Cow Disease" because the U.K. (which at the time had not signed the
prospective convention and was offended by European restrictions on the import of British beef) had gone
into a period of non-cooperation with European initiatives that unfortunately at that point included the
proposed European Bankruptcy Convention. Through some judicious maneuvering at the highest levels
of the European Union Council of Ministers, however, the late-departed convention has now been revived
in the form of a European Union (EU) Regulation.

</p><p>Although the EU political process is highly technical, there are some substantive advantages to
proceeding with this kind of regulation. As a treaty, the European Union Bankruptcy Convention would
have required each of the signatory countries to proceed to enact it through their normal legislative
processes before it could come into effect. As a regulation adopted by the European Union Council of
Ministers under the European Union Convention, it will take effect in EU member states without the need
for domestic-enabling legislation. The date currently fixed for the convention/regulation to come into force
is May 31, 2002. In European insolvency cases, the new regulation gives administrative precedence to
insolvency proceedings that are commenced in the jurisdiction of the debtor's "center of main interests."
Ancillary proceedings may be taken in other member states, but the effect of those ancillary proceedings
is restricted to assets of the debtor situated within the other state.

</p><p>The adoption of the new European Union Insolvency Regulation is a major step forward in international
insolvency co-operation, and its operation will be watched with great interest by insolvency professionals
and those involved in the international credit area.

</p><h3>U.K. Consideration of the UNCITRAL Model Law</h3>

<p>Readers of The International Scene will recall that in May of this year, Mexico became the first major
jurisdiction to enact the UNCITRAL Model Law on Cross-border Insolvency. Readers will also recall that
the substance of the Model Law is contained in chapter 15 of the proposed amendments to the Bankruptcy
Code.

</p><p>Earlier this year, legislation was introduced into Parliament in London that contemplates the adoption
in England of the UNCITRAL Model Law. The process of bringing the Model Law into domestic U.K.
insolvency legislation is complex and essentially requires administrative action by statutory regulation,
accompanied by a formal resolution of both the House of Commons and the House of Lords approving the
adoption of the Model Law. A blue-ribbon committee has been established to consider the impact of the
adoption of the Model Law on existing U.K. insolvency legislation, and the date for the Model Law coming
into force in England has not yet been set.

</p><p>In addition to the United States, countries that are presently contemplating the enactment of the Model
Law include Australia, New Zealand, South Africa and Canada. The International Scene will follow the
progress of the adoption of the Model Law in the U.K. and will report on further developments in a
forthcoming issue of the <i>Journal.</i>

</p><h3>Recognition of a Foreign Receiver Under §304</h3>

<p>Section 304 of the Bankruptcy Code seems directed toward providing assistance to <i>bankruptcy</i>
administrations in other countries, but a decision in Texas has indicated that it might not be necessary to
construe §304 that narrowly. The applicant for §304 relief was a receiver that had been appointed over the
business of a Canadian debtor by the Alberta Court of Queen's Bench. As with most Canadian provinces,
the legislative jurisdiction to appoint a receiver over a business is a matter of provincial, rather than federal,
law and does not involve the federal government's bankruptcy jurisdiction. The provincial jurisdiction is
based on statutory provisions that allow the court to appoint a receiver, where, simply, the court is
persuaded that it is "just and convenient" for a receiver to be appointed.

</p><p>The bankruptcy court held that, under the circumstances, the Canadian receiver fell within the definition
of a foreign insolvency representative and was consequently granted relief under §304. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&amp;vr=1.0&amp;cite=… re Fracmaster Ltd.</i> 237 B.R. 627 (Bankr. E.D. Tex. 1999)</a>.

</p><h3>Foreign Representatives in Canadian International Insolvency Practice</h3>

<p>When Canadian insolvency legislation was amended in 1997 to add provisions dealing with the
recognition of foreign insolvency proceedings and foreign insolvency representatives, the amendments
maintained the skepticism that is apparent in a number of countries about the <i>bona fides</i> of
debtors-in-possession. Foreign courts occasionally have some difficulty in accepting that an entity that
appears to be the same organization as it was prior to the filing of a bankruptcy case can thereafter owe
fiduciary responsibilities to creditors to whom it has already failed to honor its commitments.

</p><p>In that vein, the 1997 Canadian provisions essentially required that a foreign representative be a
court-appointed officer operating under the authority of the foreign court. The intention seemed to have
been to exclude the debtor-in-possession from being its own foreign representative in a Canadian
proceeding. There are some signs that the legislative rigidity of this position is being softened by its judicial
consideration. In a recent case involving a chapter 11 filing in Nevada and a companion Companies'
Creditors Arrangement Act (CCAA) filing in Toronto, the Ontario bankruptcy court in fact recognized an
independent "responsible officer" appointed in the chapter 11 case as fulfilling the requirements for a
foreign representative under the international insolvency provisions of the CCAA. <i>Re Agri Bio Tech Inc.</i> (<i>unreported,</i> Ontario Superior Court, May 2000).

</p><p>On the other hand, a lower court in Alberta earlier this year refused to recognize the order made in the
<i>Singer</i> reorganization in the Southern District of New York appointing foreign representatives and seeking
the cooperation of courts in jurisdictions where Singer and its subsidiaries carried on business. The Alberta
court, taking the conventional conflict of laws view of issues in international insolvency cases, seems to
have avoided the cooperation that usually is exhibited by the courts of the United States and Canada for
each other and concluded that it would not take any steps to restrain Canadian creditors from pursing their
claims against Singer's Canadian subsidiary. Apparently, if the Canadian subsidiary needed protection, it
could seek protection under Canadian bankruptcy legislation. This decision illustrates that international
cooperation in insolvency cases is still not something that can be readily taken for granted.

</p><h3>Worldwide Ancillary Injunctions Supporting Foreign Reorganizations</h3>

<p>In two recent instances, bankruptcy courts have assisted in Canadian reorganizations involving debtors
with operations and assets in the United States. In both cases, the Canadian-based debtor had commenced
reorganizational proceedings under the Canadian CCAA. Both debtors, however, had substantial operations
(and creditors) in the United States, but for different reasons they were not prepared to commence full
chapter 11 proceedings. The solution that each of them reached independently was to apply to the
bankruptcy court in the district in which most of their U.S.-based assets were centered for an order in aid
of the Canadian reorganizational proceedings that would restrain creditors in the United States from taking
proceedings against the debtors' U.S. assets. The bankruptcy courts in each case presumably considered
these applications to be non-controversial, and injunctions were granted in each case to restrain U.S.-based
creditors from pursuing their remedies against the debtors' U.S.-based assets. However, neither court issued
a formal opinion in support of its order. The first case, <i>In re Canadian Airlines International Limited</i> (Bankr. D. Hi. March 2000), involved Canada's second-largest airline, and the other, <i>In re Euro United Corp.</i> (Bankr. W.D.N.Y. January 2000), involved a major Toronto-based manufacturing concern.

</p><h3>A Worldwide Temporary Restraining Order to Protect Foreign Subsidiaries</h3>

<p>In what may be an unprecedented order, the Delaware bankruptcy court in the recent <i>Owens Corning</i>
case issued a temporary restraining order directed at a variety of international and domestic financial
institutions to restrain them from taking any actions or pursuing any remedies against the debtor's foreign
subsidiaries. The order was exceptionally broad and restrained the defendant institutions from exercising
any enforcement rights or remedies under the applicable credit agreement or under any other agreement
between the parties or under any other applicable law (with some minor technical exceptions). The scope
of the order is best illustrated by the fact that it was directed against more than 50 major international
institutions with regard to more than 100 Owens Corning subsidiaries in 20 countries around the world. The
order was not opposed by the lenders involved, and a form of cooperative standstill seems to have been
developing in the case. However, the issues relating to the order and the injunction sought by the debtor
are still current and outstanding before the bankruptcy court. <i>In re Owens Corning</i> (Bankr. D. Del. Case
No. 00-03837, Oct. 10, 2000).

</p><h3>The Forthcoming UNCITRAL International Insolvency Colloquium</h3>

<p>Two other significant initiatives on the international insolvency scene will be considered at a major
International Insolvency Colloquium to be hosted in Vienna, Austria, in December by UNCITRAL and
INSOL International in collaboration with the International Bar Association. It was a similar UNCITRAL
colloquium in Vienna in April 1994 that produced the impetus that eventually became the Model Law
on Cross-border Insolvency, and the forthcoming colloquium will focus on the major new initiatives that
are emerging in the international area.

</p><p>One important initiative that will be considered is the Statement of Principles for a Global Approach
to Multi-creditor Workouts, produced by the INSOL Lenders Group. The principles are intended to form
the basis for cooperation and coordination by lending institutions that are involved in major cross-border
insolvencies and restructurings. The Lenders Group is an impressive group; it is chaired by HSBC
Business Loans Inc. and comprises members from Barclays (as vice chair), Deutsche Bank, NatWest,
I.B.J., Credit Agricole and the British Bankers' Association.

</p><p>UNCITRAL will also consider at its International Insolvency Colloquium a proposal emanating from
the UNCITRAL Working Group of the Department of State (chaired by Harold S. Burman,
Washington, D.C.). The Working Group has produced a proposal for the development of a system that
would facilitate and enhance voluntary out-of-court restructurings in multinational cases. The proposal
is for the development of model legislation that would facilitate out-of-court restructurings on an
international scale.

</p><p><b>Editor's Note:</b> Readers of the <i>Journal</i> who have been involved in cases with interesting cross-border
elements that they would like to share with our members are warmly encouraged to contact Bruce
Leonard with their suggestions at <a href="mailto:bleonard@casselsbrock.com">bleonard@casselsbrock.com</a&gt; or by fax at (416) 640-3027. Copies of
the INSOL Lenders Group Statement of Principles for a Global Approach to Multi-creditor Workouts
and the State Department Working Group's Proposal for a Model Voluntary Cross-border Restructuring
Statute are available from the author on request. The International Scene will report further in a future
issue of the <i>Journal</i> on the results of the UNCITRAL International Insolvency Colloquium and the
progress of these two very valuable international insolvency initiatives. We appreciate everyone's interest
in The International Scene.

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