Two months after the adoption of the Concordat, a new proceeding Everfresh came along. Bruce Leonard, a Toronto lawyer and part of the Canadian team, was involved in this case wherein Everfresh operated legally and functionally intertwined in both Canada and the U.S. By "coincidence", the case came before Judge Lifland and myself and both of us had also been involved in developing the Concordat. It should then be no surprise that the judges on either side of the border enthusiastically supported the concept of developing a more general protocol based on the Concordat principles. While other functional work was progressing, a protocol was developed in a few weeks by the practitioners. Based upon a general consensus of those involved, each court approved the protocol. Matters were proceeding more quickly in Canada than in the U.S. The protocol was then utilized to hold what was the first cross-border joint hearing so that the pace of proceedings on each side of the border could be coordinated. The hearing was by way of conference telephone with counsel participating. Given the rather limited scope of the problem, the telephone facility did not constitute any particular problem. However, I would strongly recommend that if you are faced with having a joint hearing, it is preferable to conduct it through a videoconference facility to take advantage of what should be better two-way communication (speakerphones are generally one way) and the ability to "see" and react to the other side of the proceedings. Justice Forsyth of the Alberta Court and Judge McFeeley of the New Mexico Bankruptcy Court in the Solv-X case in 1996 persevered against significant technological difficulties in their telephone conference hearings. But beware – make certain your videoconference connection is workable a day or two in advance on a wet run (not dry run) basis.
After the Everfresh case finished (in about a half year), counsel on all sides were canvassed as to their satisfaction with the process. They estimated that as a result of the more timely and efficient dealing with matters, value was enhanced / preserved by a factor of some 40%. This was particularly significant when one appreciates that Everfresh was a fairly small insolvency involving some $50 million of value.
Other protocols followed in short order. These included ones outside the U.S. – Canadian ambit, including Re Commodore Business Machines (U.S. – Bahamas), Re AIOC Corp. (U.S. – Switzerland), and Re Nakash (U.S. – Israel), the latter two being of specific interest because they involved common law and civil code jurisdictions and Nakash interestingly enough had its protocol approved by the courts notwithstanding the objection of the most major party. You will be able to find an extensive list of protocols and their actual text by logging on to the website of the International Insolvency Institute (III): www.iiiglobal.org. The protocols have become more and more comprehensive – procedures have become streamlined, improved and standardized. Counsel should have no difficulty in any future case in developing a readily acceptable protocol tailored to the specific needs of their case based upon these templates. Judges will be able to appreciate that the judiciary in other cases have been satisfied with the form, content and workability of these protocols. Indeed in many instances the very presence of a protocol has eliminated direct court involvement as the parties merely proceed smoothly according to the principles involved in the protocol. As discussed in the earlier mentioned Turnaround Management Association paper:
Protocols are intended to reflect the harmonization of procedural rather than substantive issues between jurisdictions. Protocols typically deal with such items as co-ordination of court hearings in the two or more jurisdictions, co-ordination of procedures dealing with the financing or sale of assets, co-ordination in pursuing recoveries for the benefit of creditors generally, equality of treatment among the general body of unsecured creditors, co-ordination of claims filing processes and, ultimately, co-ordination and harmonization of plans in different jurisdictions. Procedurally, recent cases have tended to use Cross-Border Insolvency Protocols from the early stages of a case. Indeed in 2000, Re Loewen Group Inc. (Canada – U.S.), there was a protocol actually entered into as a "first day" order. Protocols, however, are invariably expressed to effective only upon their adoption and approval by each of the Courts involved in accordance with the local law and practice of each local jurisdiction.
There seem to be many threads which have been developing over the past decade, all with a view to making a suit to fit the requirements of international insolvency. Another example of this would be the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency. The Turnaround paper observed:
UNCITRAL began a study of the feasibility of achieving higher levels of co-operation in the international insolvency area in April 1994, as a result of an international insolvency colloquium in Vienna sponsored with Insol International. The objective in developing the Model Law was to establish a set of uniform principles that would deal with the requirements which a foreign insolvency representative would need to meet in order to have access to the courts of other countries in cross-border cases. The Model Law Project, however, evolved into a much broader work and ultimately became an agreed-upon international model for domestic legislation dealing with cross-border insolvencies that could be adopted anywhere in the world with or without variations that would reflect the local domestic practices and procedures. The Official Text of the Model Law has now been published and widely disseminated and is available on UNCITRAL’s web site at http://www.UNCITRAL.org and on the International Insolvency Institute web site at www.iiiglobal.org (at "Organizations - UNCITRAL").
The primary goal of the Model Law is to facilitate domestic recognition of foreign insolvency proceedings and to increase international co-operation in multinational cases. Foreign insolvency proceedings are divided into two categories in the Model Law, i.e., "main" proceedings and "non-main" proceedings. A main proceeding is one which takes place in the country where the debtor has its main operations. If the foreign proceeding is recognized as a main proceeding, the Model Law provides for an automatic stay of proceedings by creditors against the debtor’s assets and the suspension of the right to transfer, encumber or otherwise dispose of the debtor’s assets. The scope and terms of the stay of proceedings are subject to the normal requirements of domestic law.
The Model Law contemplates a high level of co-operation between courts in cross-border cases. Domestic courts are directed to co-operate "to the maximum extent possible" with foreign courts and foreign insolvency representatives in the Model Law: Article 26. The courts may communicate directly with each other and may request information or assistance directly from the foreign court or from the foreign insolvency representative: Article 25. Co-operation can, for example, consist of appointing someone to act on the direction of the court, communicating information by any means considered appropriate by the court and co-ordinating the administration of the debtor’s assets and affairs in both jurisdictions: Article 27. The courts may also approve or implement agreements concerning the co-ordination of concurrent proceedings involving the same debtor: Article 30.
The UNCITRAL Model Law was being formulated at the time of Canada’s 1997 amendments to the CCAA and BIA. Many of the significant concepts of the Model Law are therefore present in our present legislation, although not expressed in the language of the Model Law. The current review of our insolvency legislation will determine whether to keep the present form and incorporate the additional concepts by supplementary language or to delete the present form of s. 18.6 of the CCAA and Part XIII of the BIA, replacing that with the specific language of the Model Law, possibly with some amendment. While Canadian courts prior to 1997 relied on their inherent jurisdiction and the principles of comity, specific authorization to engage in court to court communication is now found in s. 18.6(2) of the CCAA and s. 268(3) of the BIA.
Mexico, Eritrea, South Africa, Montenegro, Romania, Poland, the United Kingdom and Japan have passed legislation to enact the Model Law, in some cases with some modifications. Many features of the Model Law were incorporated into the Canadian CCAA and BIA in the 1997 amendments prior to the finalization of the Model Law; its complete adoption is being discussed as part of the ongoing periodic review of insolvency legislation in Canada. Unfortunately its adoption in the U.S. has stalled as a result of lobby pressure directed at another portion of the U.S. Code overhaul; proposed Chapter 15 of the Code which would enact the Model Law has been variously approved by both the Senate and the House of Representatives over the past several years.
The UNCITRAL Model Law is a procedural initiative. There is another UNCITRAL initiative to develop a menu of substantive law presently underway. It is anticipated that the working group will be able to finalize its work on this project (a menu of alternatives, with a review of considerations to be taken into account with each possible selection and observations on the harmonization of the constituent parts) either at this September’s Vienna session or at the next session to take place within a half year. Developing countries will be able to tailor their insolvency regimes to fit their own requirements – an improvement over past initiatives where consultants from a developed jurisdiction would essentially recommend the adoption of the insolvency regime from the consultant’s home jurisdiction – e.g. U.S. financial consultants invariably recommended that the post-Communist countries adopt what in essence was the U.S. Bankruptcy Code. In many of these instances, these countries have gone back to the drawing board after appreciating that such a wholesale incorporation of foreign law did not address their business, social and cultural requirements. (I have previously cautioned against wholesale adoption of provisions of the U.S. Code concepts into Canadian jurisprudence given that the U.S. Code has evolved to meet specific U.S. conditions which may not be present in Canada.) In the remainder of those countries, problems continue on a limp along state. This is completely unsatisfactory, given that a workable insolvency law and regime is essential to a viable economy and especially necessary in order to attract foreign capital (loan and equity) on any reasonable basis, if at all! This Model Menu will allow developed countries to conduct a checkup on the efficiency and effectiveness of their present insolvency regimes and will therefore assist in recognizing the need for any change. The World Bank is also engaged in a complimentary program to upgrade the insolvency regimes in countries around the world.
There is a further initiative by INSOL International, an international organization comprised of insolvency practitioners with an emphasis on practitioners from the accounting and lending sectors. Aside from the biennial Judicial Colloquium sponsored jointly by INSOL and UNCITRAL (1994, 1995, 1997, 1999, 2001 & 2003), INSOL has developed an INSOL Lenders Group. This Group has developed a statement of principles for cooperation among financial institutions during multinational reorganizations. Maximization of value, preservation of viable enterprises and jobs and the avoidance of inefficient cratering have been the guidelines for the Statement Principles for a Global Approach to Multi-Creditor Workouts. Key to the underlying foundation is that the parties involved can negotiate "within the shadow of the law"; that is, that the insolvency regimes in the various countries be predictable with certainty and fairness so that negotiations can take place with a minimum of guesswork as to what would be the outcome if the courts were resorted to on any minor or major point along the way.
Additionally, there has been an American Law Institute (ALI) project on NAFTA Insolvency Law. The Restatement Paper of substantive laws of the U.S., Mexico and Canada was the first international program undertaken under the supervision of this prestigious U.S. body with major international connections. Once that Paper had been completed and accepted, it was thought helpful to see if there could be agreement on procedural matters so that there could be harmonization and coordination of the insolvency proceedings in cases which involved more than one of the NAFTA jurisdictions. This aspect was completed by the tripartite country teams and accepted by the ALI in 2000. One of the most important elements of this was the preparation of Guidelines Applicable to Court Communications in Cross-Border Cases. These Guidelines were largely based upon examples of actual cross-border cases involving protocols. The Guidelines may also be accessed through the III website. As indicated in the Turnaround paper:
The Guidelines recognize that one of the most essential elements of co-operation in cross-border cases is communication among the administrating authorities of the countries involved. Because of the importance of the courts in insolvency and reorganizational proceedings, it is essential that the supervising courts be able to coordinate their activities to assure the maximum available benefit for the stakeholders of financially troubled enterprises. (This summary is largely derived from Prof. L. Westbrook’s very eloquent Introduction to the topic in the ALI’s Transnational Insolvency Project Statement.)
It is reasonable to expect that many jurisdictions, including most common law jurisdictions, have prohibitions against ex parte communications with a Court by one party to a proceeding in the absence of the party to the proceeding. In some jurisdictions, by contrast, the prohibition may be milder and may not even exist at all. Arrangements for court-to-court communications in cross-border cases must not promote or condone any contravention of domestic rules, procedures or ethics. The Guidelines in fact specifically mandate that local domestic rules, practices and ethics must be fully observed at all times.
The Guidelines are intended to enhance coordination and harmonization of insolvency proceedings that involve more than one country through communications among the jurisdictions involved. Communications among courts in cross-border cases, however, is both more important and more sensitive than in domestic cases. The Guidelines are intended to encourage such communications and to permit rapid co-operation in a developing insolvency case while ensuring due process to all concerned. The concept of court-to-court communications is better seen as a linking of two concurrent court hearings, all conducted in accordance with proper systems and procedures. The only change form a purely domestic hearing is the technological link to the other Court.
The Guidelines are intended to be adopted following the appropriate notice to the parties and counsel as would be given under local procedures with regard to any important procedural decision under similar circumstances. If communication with other courts is urgently needed, the local procedures, including notice requirements, that are used in urgent or emergency situations would be employed, including, if appropriate, an initial period of effectiveness, followed by further consideration of the Guidelines at a later time. Questions about the parties entitled to such notice (for example, all parties or representative parties or representative counsel) and the nature of the court’s consideration of any objections (for example, with or without a hearing) are governed by the Rules of Procedure in each jurisdiction and are not addressed in the Guidelines.
One of the issues that a communication linkage may raise however, is the issue of whether the participation by a party in one country in arguments or submissions being made in the hearing in the other country constitutes a form of attornment to the jurisdiction of the other Court. The Guidelines attempt to anticipate that difficulty by indicating that such participation will not constitute an attornment to the jurisdiction of the other Court unless the party who participates in the hearing in the other Court is actually seeking relief from that Court. This is consistent with Article 10 of the UNCITRAL Model Law which indicates that an application by a foreign representative does not subject the foreign representative or the foreign assets or the affairs of the debtor to the jurisdiction of the domestic Court for any purpose other than the actual application.
These Guidelines have been incorporated into protocols – e.g. Re Matlack Inc.; Re PSINet Limited; Re Systech Retail Systems Inc.
The United States Third Circuit Court of Appeals in a 2002 decision Stonington Partners v. Lernout & Hauspie Speech Products N.V., 310 F. 3d 118 (3rd Cir. 2002) had a number of very direct and pointed observations on the need for international cooperation between courts in cross-border cases. It indicated:
We strongly recommend, in a situation such as this, that an actual dialogue occur or be attempted between the Courts of the different jurisdictions in an effort to reach an agreement as to how to proceed or, at the very least, an understanding as to the policy considerations underpinning salient aspects of the foreign laws…
While we do not know whether the cooperation [in Maxwell] was initiated by the court or the parties, there is no reason that a court cannot do so, especially if the parties (whose incentives for doing so may not necessarily be as great) have not been able to make progress on their own.
… we urge that, in a situation such as this, communication from one court to the other regarding cooperation or the drafting of a protocol could be advantageous to the orderly administration of justice.
I believe that the watchwords for any of the protocols and procedures to be tested is as follows: would the informed objective observer say that what was adopted by the Courts after receiving all submissions was fair and reasonable in the circumstances – and indeed, why has this not been adopted before as it is truly common sense.
When one looks back ten or twelve years, it is truly amazing what strides have been made in improving how to deal with cross-border insolvency cases. Waiting for the negotiation and adoption of international treaties was simply not feasible; by the time that would have happened, likely another century would have passed. I gave the following report on behalf of the 1997 UNCITRAL/INSOL Judicial Colloquium:
Under the auspices of INSOL and UNCITRAL 50 judges from 30 different countries were involved in the Second Judicial Colloquium over the previous two days. The judicial regimes represented were common law, civil law, a combination thereof, and from other traditions besides these. It is not surprising that judges may vary in their approach to matters to reflect different concerns in different parts of the world. However, given that the judicial perspective is to ensure that justice is done in the cases before the court, it is also not surprising that, despite these differences, there is a general consensus of thoughts on international judicial co-operation and communication. The Colloquium has allowed the judges to explore these matters and to appreciate that we have a common interest over a wide variety of subjects.
Of course, law cannot operate in isolation and insulation from the society and economy in which it is to function and regulate conduct and activities. The economy is not merely a domestic one, as it will be influenced by foreign trade and investment going both ways. Therefore, no country’s legal system can operate without having regard for the activity of neighbouring states. Given the high degree of internationalism in trade and investment, the world has, in this respect, become a very small place; I believe we must regard each and every state as being neighbours.
Judges at the Colloquium were of the consensus that it was important to avoid these problems. This could be achieved not only through agreement to co-operate, but they were also of the view that, in essence, where there are concurrent proceedings it should be determined whether deferment to the other court on material issues more directly affecting that jurisdiction may be possible and with reciprocal treatment. We must, of course, recognize the sensitivity of the situation – countries will have concerns about the integrity of their jurisdiction, including substantive and procedural concerns. These must be accommodated and on a two or multiple way basis. In addition, there is the aspect that, through improved communication, there could be a timely exchange of valid information amongst the concerned courts. …
… INSOL and UNCITRAL will continue to hold a Judicial Colloquium, and INSOL will initiate a separate section for the judiciary to deal with these matters on a continuing basis between Colloquia.
How do the bar and insolvency practitioners fit into this equation?
- The judiciary rely upon you as professionals – skilled practitioners in the field – to implement these proposals and generally to assist in these matters.
- As a result of this initiative you will know what is expected of you and how to implement it through building on the Concordat and the UNCITRAL model law and other valuable initiatives from time to time. There will be the desirability of your taking the opportunity during the immediate stabilization period provided by stays to see whether using the Concordat and the draft UNCITRAL model there can be harmonization between the various concurrent proceedings – both as to procedures and timing. This hopefully will lead to the timely and cost-effective development of a protocol to be entered into amongst affected parties and thereafter submitted for consideration and approval by the respective courts. Once you review the Concordat and the UNCITRAL draft you will see that there is a fertile field of possible steps to consider and adopt with suitable changes into a protocol. It is expected that you will be significantly advanced on the learning curve through the use of Concordat and UNCITRAL so that you will be able to "shortcut" the negotiating time required to table a protocol. It will be helpful to the parties concerned and the legal system generally to make every effort to effect this protocol harmonization.
- The courts will rely on you to carry their message of co-operation and communication as expressed in formal orders and accompanying reasons to the other courts – reliably and faithfully.
- In this regard we in the judiciary may need your assistance to ensure that where transcripts are not a regular feature of the domestic court a transcript to the extent desired by the judge can be made available forthwith. We will also need your assistance with respect to excellence of translation (not mere words but concepts – the opposite to legal research by computer which is based upon word identification and not concept analysis).
- You will be expected to advise the local court of what procedures are taking place in other jurisdictions, and to maintain an update of that situation.
- The courts will recognize the need for you to return to them to obtain appropriate relief from time to time, including adjustment of any initial order or orders which may have been deployed in the immediate emergency circumstances.
We, as judges, will rely upon counsel and insolvency practitioners to take the lead in providing the conduit for judicial co-operation and communication. We are confident that we can rely upon you as professionals to ensure that justice is done.
The key in this Colloquium is that the participating judges have reached consensus about being outward-looking – rather than inward-looking. International insolvencies are truly international; they are not local, with merely local solutions. We have progressed beyond national interests; we are now clearly looking at international concerns. As we approach the next millennium, we must not be looking backwards toward the nineteenth and early twentieth centuries; rather, we must be forward looking to solve our problems.
Cross-border insolvency matters between the U.S. and Canada have been dealt with smoothly and expeditiously between the courts of these two countries. Clients and their counsel have ably assisted in this regard. The end result is that both countries have benefitted. This cooperation has a firm foundation in the general law as discussed above.
It is important that the court system in any country be set up in such a way that the public and litigants have the utmost confidence in it. This is particularly important where there may be a high degree of foreign participation in the lawsuits. Needless to say the court system must be blind as to the nationality or domicile of a litigant (except as to security for costs concerns). Otherwise needed foreign investment will tend to dry up or become considerably more expensive, thereby depriving the domestic economy of the opportunity to fully develop its growth potential and deprive the society of the economic engine working to efficiency to fund social needs. In any event the courts should, in fact, must be independent of the rest of government, accountable according to publicly available criteria only in the same way that courts are in other parts of the world. Judges must be neutral and objective. Their remuneration and tenure of office must be sufficient to attract competent appointees. They must be and perceived to be beyond reproach. I know that all of you here take a particular and justifiable pride in this regard.
Allow me to conclude by observing that what I have been describing is the way by which courts and the practitioners have dealt with cross-border insolvency matters. However, the general principles and approaches involved here are not restricted to the insolvency arena. Indeed, colleagues who have been engaged in class actions and other general litigation cross-border matters have begun to ask "Why not our sector?", appreciating that there is a need for harmonization and coordination in their fields across provincial and national boundaries. Why not indeed!
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.