Bankruptcy in the International Context

What is Bankruptcy

Bankruptcy (insolvency) is a court-recognized inability of a debtor to fully satisfy the claims of creditors. The purposes of the procedure are: (1) the fair distribution of assets among creditors, (2) providing the debtor with a "fresh start" (in consumer bankruptcy), (3) restructuring a viable business.

Priority of Creditors

In bankruptcy, assets are distributed in strict order of priority:

1. Secured creditors (up to the value of the collateral)
2. Preferential creditors (employee wages, taxes)
3. Unsecured creditors
4. Subordinated debt
5. Shareholders (receive the remainder, usually nothing)

Restructuring vs Liquidation

Restructuring (Chapter 11 in the USA, supervision/financial rehabilitation/external administration procedure in Russia) is an attempt to preserve the business by restructuring debts. The court protects the debtor from creditors during the restructuring period (automatic moratorium).

Liquidation is the sale of all assets and distribution of proceeds to creditors. The company ceases to exist.

Cross-Border Bankruptcy

When a company with assets in several countries goes bankrupt, the issue of jurisdiction arises. UNCITRAL Model Law on Cross-Border Insolvency is an international standard adopted in many countries (USA, United Kingdom, Australia, Japan).

Center of Main Interest (COMI) is the country where the main business and management are concentrated. It is COMI that determines the jurisdiction of the main bankruptcy proceedings.

Practical Assignment

A holding company is registered in BVI, an operating company is in Russia, assets (real estate) are in Germany. The holding declares insolvency. Determine: (1) In which country will the main bankruptcy proceedings be held? (2) How will creditors from different countries submit their claims? (3) What is the priority of Russian secured creditors?