Lending contracts involve the transfer of ownership of an asset by a creditor to a debtor with stipulation on how future repayment is to be made. For example, if a zero-coupon bond is sold to a creditor, the creditor will require repayment of par value of the bond at maturity.
When the debtor is unable to pay its debt to the creditor, the debtor is said to be insolvent. The legal process in which the debtor and creditor renegotiate the terms of repayment or where any or all obligations made by the debtor to the creditor are discharged is called bankruptcy.
Bankruptcy and Insolvency in Canada
In Canada, the federal government has jurisdiction over bankruptcy and insolvency. This means that the provinces in confederation have agreed that the parliament of Canada is the ultimate arbiter of legislation relating to bankruptcy and insolvency. Two acts exist. The Bankruptcy and Insolvency Act relates to people, while the Companies’ Creditors Arrangement Act relates to companies.
Each province has its own B&I legislation for property exemption, debt collection and enforcement of court orders. For example in Ontario the laws are governed by the Execution Act.
International Bankruptcy and Insolvency
International bankruptcy and insolvency regulation provides a framework for the management of cases where the debtor and creditor are citizens of distinct nations or when borrowed assets exist in more than one nation.
There are three types of approaches to cross-border insolvency, each identified by the legal mechanism that judges the case. In the territorialist approach each nation applies its own laws to all debtor’s assets and creditors located in its jurisdiction. The universalist approach, all jurisdictions agree to apply a universal set of laws to handle cross-border insolvency. A hybrid approach coordinates the activity of courts in each nation. A spectrum of hybrid approaches have been proposed, from modified universalism to co-operative territorialism.
A purely territorialist approach is not generally an adequate legal framework for most cross-border insolvency cases, and the universalist approach is an aspirational legal framework that does not currently exist, so cases are tried using hybrid approaches that utilize appropriate legal frameworks.
Legal Framework
A commonly used legal framework is UNCITRAL Model Law on CBI. The United Nations Commission on International Trade Law (UNCITRAL) is the core legal body that harmonizes international trade law. CBI legislation has been agreed to by many member states including Canada, USA, and UK.
Of relevance is establishing COMI (centre of main interests), the primary jurisdiction where the debtor conducts the administration of its interests in a bankruptcy proceeding. COMI determines which nation’s laws dominate in rulings related to the case.
Criticism of COMI
As the size of international bankruptcy increases allocation of COMI becomes more difficult since the laws of a nations are often mutually inconsistent and can offer distinct remedies to common legal issues. It becomes advantageous for the debtor to select a jurisdiction where their interests are more favourably addressed. Political factors also appear since the United States as the default COMI jurisdiction faces competition from other nations that seek to offer competing services to the global marketplace. One approach to rectifying issues related to jurisdiction shopping is to compel debtors to agree to a jurisdiction at the signed of a contract.
References
Raedwulf Securities Blog 