International Bankruptcies

Recent decades have seen increased trade, commerce and investment across national borders.  When the transaction or investment goes well, no problem.  When the deal goes bad, however, many problems.  Consider, for example, a company in France which has assets in France, as well as significant assets in the United States.  The company files a bankruptcy case in France.  Does the French Bankruptcy automatically have "extraterritorial" effect?  Do French law and the rulings of the French bankruptcy court bind United States creditors?  Must United States creditors who are owed money by the company in bankruptcy hire a French attorney to assert their claims against the estate? 

In response to these issues, Congress passed section 304 of the United States Bankruptcy Code.  This provision provides for a representative of the foreign bankruptcy estate to file a petition in the United States Bankruptcy court initiating an ancillary bankruptcy case.  The United States Bankruptcy Court can, in such instances, enter an order protecting assets of the foreign bankruptcy estate located in the U.S. from seizure by U.S. creditors, enjoining acts against the foreign debtor or its property, and providing for the determination of claims against the foreign estate in a U.S. Court.

The Court, however, is not required to enter an order protecting the foreign bankruptcy estate from actions by U.S. creditors.  Instead, the Court must weigh various factors such as:

1. "comity", which means the mutual respect that separate legal systems have for the rules and procedures of another court;

2. whether there are significant differences in the treatment of creditors under the foreign nation's bankruptcy system which would adversely effect U.S. creditors;

3. the inconvenience of U.S. creditors asserting their claims in the foreign proceeding.  For example, if there are numerous U.S. creditors owed relatively small amounts, but the aggregate amount is significant, the Court will be less favorably disposed to order an ancillary proceeding.  This is because the U.S. creditors could be harmed by the expense and inconvenience of hiring French counsel to pursue their claims or respond to any objections to the claim by the representative of the French estate.  On the other hand, if the U. S. creditors are money center banks owed millions or billions of dollars, then the Court will have little concern for whether the creditor must hire foreign counsel to pursue its claim

Often creditors in the United States file an involuntary bankruptcy petition against the foreign debtor.  At that point, there are pressures of Court vs. Court.  In such cases, there have been special orders entered by the respective courts calling for certain assets to be administered solely by the American Court. 

Current indicators predict that there will be more cross border insolvency in coming years.