A CONVERSATION AMONG INSOLVENCY PROFESSIONALS: THE IMPACT OF INSOLVENCY REMEDIES ON INTERNATIONAL BUSINESS AND TECHNOLOGY

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1 A CONVERSATION AMONG INSOLVENCY PROFESSIONALS: THE IMPACT OF INSOLVENCY REMEDIES ON INTERNATIONAL BUSINESS AND TECHNOLOGY INTRODUCTION By: Michael N.W. Baigel, FCA (UK), FIPA, CIRP In recent years, the global economy experienced the greatest peace time crisis in living memory, and governments everywhere still tremble when considering the stability of the recovery. At the same time, the business market changed radically during the past 20 years with the advent of the internet and increasing numbers of corporations now reach across the world to invest in all countries where brainpower can be harnessed. The USA, Canada and Israel are at the forefront of such trade and investment, but the investments are no longer solely constrained to single industries or to a couple of countries. Added to the burden of doing business on an international scale, businesses also operate in myriad jurisdictions where they have to contend with differing regulatory authorities whilst governments continue to increase borrowing and spend more than they generate from taxation. Thus, there will be monetary and regulatory pressures inducing business failures and closures of divisions, with effects that will not be contained within a single zone. Each country has different insolvency legislations and jurisdictions to meet the challenges of an economically interdependent planet. Insolvency remedies differ from country to country, and sometimes from state to state or province to province, yet before one can determine a remedy for a distressed business, one must first consider: a) the type of assets (whether physical or intellectual); b) the value of the assets; c) where the assets are situated; d) the ability to realize on the assets; e) where control of the assets is exercised; and f) local insolvency and other laws, public policy and priorities. Only as a remedy is formulated based on the above considerations, should insolvency professionals worry about the location of the stakeholders who will benefit from the distribution of proceeds realized from assets. 1

2 Particular problems apply to technology companies because the true value of these businesses resides not only in soft assets such as patents, but also in the intellectual property encompassed within the expertise and knowledge base of the workforce. MODEL LAWS THE SOURCE OF INTERNATIONAL INSOLVENCY REMEDIES The greatest impacts upon the creation of international insolvency remedies are those of differing jurisdictions and the potential competition between self-interested stakeholders forum shopping. To alleviate these problems, some countries introduced provisions in their domestic laws to address cross-border issues. In response to the increasing number of complex international insolvencies, there have been several initiatives to better coordinate international insolvencies. Solutions were needed for: harmonization of the operation of courts and authorities in cases of cross-border insolvencies; legal certainty; recognition of foreign proceedings; and fair and efficient administration of competing insolvency entitlements and enforcement rights. The initiatives include, but are not limited to: a) the Model Law on Cross-Border Insolvency ( Model Law ) developed by the United Nations Commission on International Trade Law ( UNCITRAL ); b) the European Union Regulation on Insolvency Proceedings 2000 ( EU Regulation ); c) UNCITRAL`s Practice Guide on Cross Border Insolvency Cooperation; and d) UNCITRAL s Legislative Guide on Insolvency Law, Part three: Treatment of Enterprise Groups in Insolvency. In 1997, the Model Law was adopted by UNCITRAL and the General Assembly of the United Nations. Although the Model Law has been used as a basis to include provisions within the insolvency and restructuring regimes of several countries, because of variations in judicial decisions, text, competing domestic legislation and legal heritage, there have been variable results in its application. As mentioned, this can lead to forum shopping, as determined by the perceived culture of the insolvency regime and such considerations as abilities for a debtor to remain in possession during a process or for distressed finance to be procured to fund the process, and its friendliness and flexibility to rescue efforts via restructurings, rather than a liquidation. Nevertheless, although the texts and their interpretation vary from one country to the other, the 2

3 general objective of the cross border provisions inspired by the Model Law remains true. The Model Law seeks to promote international cooperation in cross-border insolvency in three major ways: setting a framework for the courts to coordinate and cooperate with each other; limiting the scope of local bankruptcy proceedings when foreign proceedings have commenced; and granting local relief to foreign representatives. It should be noted that any relief granted to foreign representatives is not intended to be an automatic acquiescence to foreign laws. The Model Law contains a general public policy exemption so that courts need not make an order if it is manifestly contrary to a public policy of that country. That said, the exemption is used sparingly. The US in particular has had a flurry of cases recently concerning the application of the public policy exemption, including one relating to an Israeli proceeding, re: Gold & Honey, Ltd. In another case, Qimonda AG, a German company sought to cancel licenses of US patents which was a permissible act under German law. The holders of the licenses objected because they had made substantial investments on the basis that they would be able to access the patents after acquiring the licenses. The US Bankruptcy Court, Eastern District of Virginia decided that if the license holders continue to pay royalties, then it would be manifestly contrary to public policy to void the licenses. As such, the licensees retained their rights to the US patents. Obviously, the US Court could not make a binding determination against non-us patents. There are additional risks in cross-border insolvency mandates because, for instance, environmental, tax, foreign exchange, and insurance requirements vary greatly from country to country and these cannot be flouted by relief granted to foreign representatives. One cannot exempt oneself from laws in a country on the basis that operational headquarters are located elsewhere. The EU Regulation came into force in 2002 and applies to European Union member states. It provides regulation for the jurisdiction of a court in a member state of the European Union for the commencement of insolvencies and the automatic recognition of these proceedings in other EU member states, together with the governing law for the proceedings and the power of the insolvency or restructuring practitioners in the various member states. Should a member states insolvency law conflict with the EU regulation, the EU regulation takes precedence. MODEL LAW ADOPTEES & AN ORPHAN Canada, UK and the US legislated variations of the Model Law that permit foreign courts to apply the principle of comity, thus avoiding creditor competition. Comity being the doctrine that a jurisdiction recognizing the acts of another jurisdiction will receive a similar standing in 3

4 return. This allows a complementary process, even between common law and statute based Roman law jurisdictions. Israel has not legislated a variation of the Model Law, and not being a member of the EU, neither has Israel been able to adopt the EU Regulation. Nonetheless, Israel s insolvency regime is largely based upon historic UK law (and common law). Thus, to the credit of a Judge in a case which was seeking a recognition of UK insolvency proceedings, even though Israel had no statute or regulation directly addressing the issue, the Judge provided the recognition sought by relying upon the principles established in the Model Law and EU Regulations. However, this decision is currently under appeal in Israel s Supreme Court. The implementation of a cross-border protocol, to deal with differences between insolvency regimes and to more effectively coordinate proceedings, is more readily achieved when both regimes have Model Law based provisions. This has enabled joint hearings of Canadian and US courts, thus ensuring all stakeholders can be treated equitably in one effective forum. For the purposes of the discussion below, the relevant legislation and regulations for Canada, Israel, UK and USA are: Canada: Bankruptcy and Insolvency Act ( BIA ), Companies Creditors Arrangement Act ( CCAA ) Israel: Bankruptcy Ordinance , Companies Law , Companies Regulations , Companies Ordinance UK: Insolvency Act 2000 ( IA ), The Cross-Border Insolvency Regulations 2006 ( CBR ) US: United States Bankruptcy Code, Chapter 15 KEY DEFINITIONS See Appendix I for Legislative references. Centre of Main Interest: will be discussed in more detail below in the section regarding forum shopping. In brief, it is the location where a debtor conducts the administration of its interests on a regular basis, generally referring to a registered office in the absence of contrary proof, and that is ascertainable by a third party. The centre of main interest may be challenged, and determined by a court. Foreign Main Proceeding: is a judicial or administrative proceeding in the jurisdiction where a debtor has its centre of main interests. This will be a foreign jurisdiction where assets and affairs 4

5 of the debtor are subject to action under insolvency or restructuring legislation, and in which the interests of all creditors are being managed. This also applies to interim proceedings. Foreign Non-Main Proceeding: refers to any other foreign proceeding than a foreign main proceeding. Foreign Representative: is an entity authorized to act as a representative in a foreign proceeding, to administer and/or monitor a debtor for the purpose of reorganization or liquidation. KEY UNDERSTANDINGS Standing and Powers of Foreign Representatives Upon recognition of a foreign proceeding, a foreign representative has standing to continue or begin proceedings in matters concerning the debtor, often in a manner such that the foreign representative acts as if they were the debtor or a creditor. This standing can enable the foreign representative to even appoint receivers, or have the debtor enter other insolvency and restructuring proceedings. Recognition of Foreign Proceedings Recognition of foreign proceedings typically begins with a petition to a court by a foreign representative to recognize the foreign proceedings. Documents to be submitted to court vary across jurisdictions but will include certified copies of orders or certificates commencing a foreign insolvency, proof that the foreign representative is authorized to act, a listing of all foreign proceedings with respect to the debtor to the best of the foreign representative s knowledge, and if need be, a translation of all of the documents. Stay and/or Suspension of Proceedings A court will order that the debtor is able to avail itself of a stay of proceedings if the recognition order provides that a foreign proceeding is a foreign main proceeding. Nevertheless, the stay will be prohibited or modified if it is inconsistent with the relief granted in the jurisdiction now considering the foreign proceedings. The aim of such a stay is protect the interests of both the debtor and its creditors. In the case of foreign non-main proceeding, the court may make an order providing for a stay, but is not obliged to do so. Court Powers The court can make an order as per its discretion, with a proviso being that any orders should be consistent with provisions of the insolvency legislation in the court s jurisdiction. As such, even if a recognition order has been made in respect of a foreign main proceeding, it is still possible for insolvency proceedings to commence in a jurisdiction where there are assets or an establishment. If a main proceeding has been opened in an EU member state, then such a 5

6 secondary insolvency proceeding must be effectively in the nature of liquidation as per the EU Regulation. Rule of Payment in Concurrent Proceedings Hotchpot Rule These rules ensure that all creditors receive equitable treatment and share distributions from an insolvent estate equally, as per their priority ranking. A distribution to creditors being calculated in a home jurisdiction must take account of other payments made in respect of the same claims in foreign jurisdictions, to ensure all creditors in a class receive an equivalent distribution. CHALLENGES AND VARIATIONS IN MODEL LAW APPLICATION FOR HIGH TECH COMPANIES: THE P S PHORUM SHOPPING, PATENTS, PENSIONS, PAYROLL & PRIORITIES Phorum Shopping - Centre of Main Interests ( COMI ) Perhaps most critical to international insolvencies is that key day to day activities of a global enterprise may either take place autonomously in many jurisdictions or they may be highly centralized. Crucial to a successful international insolvency and/or restructuring is that there is an ultimate source of direction, co-ordination and judicial control. Thus, whilst the location of the foreign main proceeding may determine the best chance of recourse for a particular stakeholder class, the Model Law introduced the term centre of main interests ( COMI ) to identify where a foreign main proceeding should take place. Curiously, the Model Law fails to define the term although the UNCITRAL Legislative Guide on Insolvency Law defines COMI as the centre of main interests should correspond to the place where the debtor conducts the administration of its interests on a regular basis and that is therefore ascertainable by third parties. UK regulations adopted this definition. In Canada, the CCAA (s.45) but not BIA, identifies a COMI to be in the absence of proof to the contrary, a debtor company s registered office is deemed to be the centre of its main interests. US Chapter 15 spells COMI as the center of main interests but also does not provide a definition. The EU Regulation also does not provide a COMI definition but uses the notion to determine where main proceedings should occur. In the case of Eurofood IFSC Ltd., the European Court of Justice set out principles to be used in determining a COMI. In North America, Canadian and US courts determined a COMI to be situated in Canada in the case of Muscletech Research and Development Inc. based not only upon the location of the registered office, but also after considering litigation (commenced in the US) and administrative and operational control. 6

7 In technology based enterprises, the COMI may not reflect where true value of the assets resides. For instance, many companies have set up research and development centres in Israel which will be critical to producing technological advances to compete in the future. Should a foreign parent company enter an insolvency proceeding, it is entirely possible that main asset will be the intellectual property residing in Israel, not only in terms of patents but in terms of the workforce. Notwithstanding the above and even the commencement of insolvency proceedings in a jurisdiction, the COMI can be subject to challenge. The concept of the COMI is to prevent forum shopping and provide the insolvency with a fair basis for all stakeholders. Asset Realization - Extra-territorial Some insolvency regimes contain provisions that assume their powers can reach beyond their borders. The BIA in Canada provides that a bankrupt s property, wherever situated in the world, vests in the bankruptcy trustee. Certain US laws challenge this assumption by making provision that assets situated in the US be first realized for the benefit of US creditors. This is to prevent value being repatriated beyond the creditors reach with attendant additional cost and subject to a jurisdiction with which they will usually be unfamiliar. Patents - Asset Realization - Intellectual Property Realization - Nortel Nortel Networks Corporation ( Nortel ) was a major technology company, headquartered in Mississauga, Ontario, Canada and in early 2009 it filed under Chapter 11 of the United States Bankruptcy Code in the US, under the Companies Creditors Arrangement Act in Canada and under the Insolvency Act in the UK. Ultimately, Nortel was not able to emerge from bankruptcy protection. The challenge that faced the insolvency practitioners tasked with liquidating Nortel s assets was how to maximise realizations from various interdependent subsidiaries, units, intellectual and real property strewn over 70 countries. Nortel s intellectual property portfolio consisted of more than 6,000 patents and patent applications which were leveraged in Nortel s products sold around the world. Given the size of such a portfolio, the patents inter-relationships and existing license agreements, it was challenging for technological experts, never mind insolvency practitioners, to ascertain the scope and value of the patents. Once it became apparent that efforts to rescue Nortel as whole had failed, stakeholders in multiple jurisdictions concurred that the most effective way to sell Nortel s business units and intellectual property was on a co-operative basis that pooled local assets. Crucially, the decision was made to sell Nortel s business assets in stages. Initially, the sales were completed mainly via a series of auctions (several of which were via a stalking horse bidding process). Nortel left the best assets to last; its 6,000+ patents and patent applications. The patents were put up for sale via a stalking horse bid process and Google played the role of the stalking horse with 7

8 a starting bid of US $900 Million. As the auction progressed, Google later increased their bid a number of times and perhaps in an effort to avoid boredom, in amounts reflecting mildly obscure mathematical constants in number theory. However, Google eventually lost out to a consortium of Apple, EMC, Ericsson, Microsoft, RIM and Sony. The sale of the patents was approved by a joint hearing of the Ontario Superior Court of Justice and the US Bankruptcy Court in Wilmington, Delaware. The sale price was a success and the mechanism used has set down a precedent for achieving maximal realizations for multi-national groups with a disparate intellectual property portfolio. The consortium members were left to themselves to decide which patents were to be allocated to which member. Co-operation between the three main concurrent insolvency proceedings resulted in the maximization of asset value for the benefit of stakeholders. Priorities Once assets have been realized, the most contentious area in international insolvency is that of priority who receives what allocation and when. There are great differences within the various insolvency regimes themselves, and even priorities supposedly established over many years can suddenly be reversed upon an unexpected judicial decision. Not only is one then competing between jurisdictions, but one also has to consider the established priority of claims within a domestic environment before seeking foreign recognition. For instance, the priority ranking entitlement may be fought between governments, employees, company pensioners, secured creditors, trade creditors, bond holders and those who advance funds to enable a restructuring to be attempted and take security as a debtor-in-possession. Suffice to say, it is beyond the capacity of this document to review all the differing entitlements by jurisdiction, so a few challenging examples will be provided. Priorities International - Pensions - Nortel The success of the sale of the assets of Nortel provided approximately US$7-7.5B to be allocated to creditors. Whilst the COMI was identified as Canada, problems arose with Nortel s UK company pensioners. The UK insolvency process was an Administration and Nortel s UK pension plan was estimated to have a deficit of UK 2.1 Billion at the date of insolvency, part of which was allegedly guaranteed by the Canadian company, Nortel Networks Limited. The trustees of the Nortel Networks UK Pension Plan filed a contingent claim for the estimated deficiency. Until a very recent case (Indalex, which will be discussed briefly below), it is fair to say that pensions were treated as unsecured creditors in Canadian insolvency proceedings. This is not the case in the UK which has more stringent pension protections due to a number of unfortunate incidents in the 1980 s and 1990 s. As a result, the UK Pensions Regulator issued a Financial Support Direction ( FSD ) against 25 Nortel related companies, after the initial date of 8

9 Nortel insolvency and filings in the various jurisdictions where a stay of proceedings was required and had been obtained. The UK Pensions Regulator obtained a judgement from the UK Court of Appeal in 2011 that an FSD is to be considered an expense of the Administration and required the pension deficiency to be paid as such i.e. before unsecured creditors. The Ontario Superior Court of Justice ruled that the FSD breached the stay of proceedings and would not be effective in the Canadian insolvency process, which is where the asset realizations reside. Similarly, the US Court of Appeals found that the UK Pensions Regulator (and the UK s Pension Protection Fund) were not entitled to an exemption from the bankruptcy stays, and could not seek a super-priority payment as a regulatory mechanism ahead of other unsecured creditors. The argument continues in the UK, and in May 2013 the Supreme Court will further consider the interaction of the UK s pension and insolvency regimes. The Supreme Court will determine if an FSD will rank a pension deficit claim ahead of other unsecured creditors. Thus, at this time, the issue is still unresolved. Priorities Domestic - Pensions Indalex A recent example of the priority entitlement being reset within a domestic framework was the case of Indalex Limited. Uncertainty raged within Canada s own insolvency regime until a decision of the Supreme Court of Canada in February 2013 regarding Indalex Limited, a Canadian company. A parent company, Indalex U.S., filed for creditor protection in the US in 2009 and Indalex Limited also applied for creditor protection under the Companies Creditors Arrangement Act ( CCAA ) in Canada. The court issued the appropriate Initial Order and also specifically granted a superpriority charge in respect of a loan advanced under a debtor-in-possession ( DIP ) financing agreement provided for in the provisions of the CCAA. The assets of Indalex Limited were realised by way of a going concern sale approved by court and approximately CAD$6.75Million was available from the sale. Indalex Limited had two defined benefit pension plans consisting of a salaried plan that had been wound up in 2006 and an executive plan, and Indalex Limited acted as pension plan administrator for each. The purchaser did not assume either pension plan. The pension contributions had been paid up to date by Indalex Limited, but being defined benefit plans, a deficiency had arisen of CAD$1.8 Million for the salaried plan and CAD$3.2 Million for the executive plan. The United Steelworkers of America union acted for the salaried plan, and together with a group of executives for the executive plan, because of the provisions of the Pension Benefits Act (Ontario) they claimed a deemed trust for sale proceeds ahead of repayment of the DIP funds, which was subject to charge ranking ahead of all other security 9

10 interests of whatever sort. Indalex U.S. had guaranteed the DIP loan and had fully repaid the DIP lender the loan, and thus had subrogated its position. The pension plans claimed that the Pension Benefits Act (Ontario) created a deemed trust for the whole deficiency of a pension plan and not just for any contributions or special payments still due. In 2010, the Ontario Superior Court of Justice found no deemed trust existed. The Ontario Court of Appeal reversed this decision in 2011 in respect of the salaried plan and decided that a deemed trust existed in respect of a wound up plan. The Ontario Court of Appeal granted a priority to the two pension plans for whole deficiencies on defined benefit plans, ahead of DIP super-priority charge. In respect of the executive plan, the Ontario Court of Appeal also managed to find that Indalex Limited had breached its fiduciary duties by filing a CCAA and obtaining DIP financing with an associated charge that would be ahead of a deemed trust for a potential deficiency of the executive plan beneficiaries. Notwithstanding that Indalex Limited was insolvent, the Ontario Court of Appeal found that the act of obtaining DIP financing for the purposes of a restructuring that enabled a going concern to be sold, was only in the interests of Indalex Limited and not in the best interests of the executive plan beneficiaries. In 2013, the Supreme Court of Canada overturned the Ontario Court of Appeal s decision regarding the priority of the DIP charge, but put the entire deficit of a wound up pension plan (i.e. the salaried plan) ahead of all other secured creditors and unsecured creditors in respect of accounts receivable and inventory (current assets) of Indalex Limited. Whilst this was a Canadian case, the issues also revolved around attempts to reconcile pension and insolvency law. Whilst Indalex Limited had knowledge of a potential deficiency in the pension fund, actuarial valuations need only be carried out every two years in Canadian pension funds, and given the recent volatility of markets, two years can have a large impact on the value of investments. As it is, bondholders and secured lenders must now tread warily where wound-up defined benefit pension plans exist. Priorities Employee rights in an insolvency Treatment of employees in an insolvent situation also varies between countries, provinces and states. An example was demonstrated when Canada introduced the Wage Earner Protection Program Act ( WEPPA ) in 2008, with revisions in 2011 to amend obvious omissions in the Act, such as a main restructuring tool (CCAA) initially being excluded. Many WEPPA procedures were largely akin to the UK s Employment Protection (Consolidated Act) 1978 ( EPCA ) which was repealed due to a number of practical and political difficulties and replaced by the Employment Rights Act in 1996 ( ERA ). The ERA in turn was amended in Thus, Canada instigated a 30 year old precedent from the UK that was found to be wanting and replaced more than 10 years ago. 10

11 The actual idea behind WEPPA, EPCA and ERA is a good one. The Acts give limited assistance, within a short time frame, to those most vulnerable and immediately affected by an insolvency - the employees. This is especially helpful to lower earning employees who are unlikely to have sufficient savings or liquidity to cope with such a trauma. In the case of mass layoffs or communities which rely heavily on one industry, the local employment market will often also be filled with persons having a similar skill set, and therefore, unemployment can be of an extended duration. As such, the social principles behind the application of such an employee protection program are worthy. The crux of the employee protection in insolvency in both Canada and the UK can be summed up as: government lends a limited sum of money to terminated employees who are owed earned income; and government subrogates the employee rights and enjoys a priority status against current assets for money advanced to employees. However, variations immediately begin with creditor voting rights, the basis of claim calculation, taxation and charges for each program. Claims UK wage arrears claims are subject to a limit of weeks, but can be calculated for the most beneficial weeks that are in arrears prior to the insolvency. The weeks claimed do not need to be consecutive, nor even the most recent, but simply to maximize the employee s claim. WEPPA does not address whether an employee can choose the best period from the 6 months prior to insolvency to maximize their claims, or not. In large international insolvencies with significant employee numbers, the variation of the wages claims can therefore vary greatly in different jurisdictions even if the employees perform similar roles for similar compensation. In terms of the amount of subrogated claims in the UK, these are calculated in lieu of the employees rights i.e. the net amount received by the employee (since tax should have already been deducted and paid over to government). Additionally, in the UK, union dues and other similar deductions taken at source from employee wages but not paid over, go to an employee, not to the deductee beneficiary. WEPPA is not clear whether these deductions are termed as wages in Canada. WEPPA creates a single subrogated creditor and the Crown (government) has the voting rights of the employees claims: thus it can quickly become the largest creditor in the insolvency proceedings, but the amounts admitted can vary according to jurisdiction. 11

12 Taxes The UK provides that the basic rate of tax and other deductions are withheld from the payments to the employees, and that tax deductions from the loan are not levied at preinsolvency filing pay-as-you-earn levels. WEPPA provides that payments will be subject to income tax and take into consideration other appropriate contributions omitting what rate of tax is to be applied, although in practice the basic rate of tax has been applied, and the employee left to sort out any additional amount due. Security/priority WEPPA payments are secured against current assets (curiously undefined by WEPPA) of an insolvent company to a maximum of CAD$2,000 but in the UK priority entitlement is against floating charge realizations, although there has been a hotly disputed test case regarding the classification of book debts in an insolvency. Thus, floating charge realizations may be more severely depleted in the UK than in Canada. In summary, variation in treatment of taxes, deductions and different classification of assets for claims to be charged against, can result in significantly different realizations being sought by way of foreign recognition. JOINT FILINGS & CROSS BORDER INSOLVENCY PROTOCOLS In spite of the Model Law and its adoption in several jurisdictions, the insolvency laws of different countries may remain irreconcilable. In re: Philip Services Corp., some creditors objected to a plan of settlement because of the plan s treatment of Canadian based contingent claims that would have no standing in the US and it was not possible to reconcile the laws of each country in this situation. Thus, a Canadian court determined that it would not approve the plan of settlement, nor relinquish its own jurisdiction. In an effort to avoid such intractable problems that may defeat a restructuring, debtor companies may seek to utilise joint filings and/or establish cross-border protocols. The joint filings refer to contemporaneous filings in courts of different jurisdictions and allows joint hearings to be held with each court, courtesy of modern technology. A complex business that trades or has assets and operations in multiple jurisdictions may choose to seek joint filings for bankruptcy protection in various jurisdictions for an assortment of reasons. The co-ordination of the proceedings may result in a more efficient and consistent application of law to enable a restructuring to occur, and to provide certainty to stakeholders where the laws of differing jurisdictions are in conflict. Where joint filings are made, it is usual for them to be limited to two or three locations because the mechanics of numerous courts operating in different manners and time-zones would otherwise make the process unmanageable, even with the best of intentions. Although Canada 12

13 and the US have adopted the Model Law in their bankruptcy legislation, joint filings are most common in this region. Thanks to the proximity of the nations and the North American Free Trade Agreement, many businesses in each country conduct significant cross-border trade. Joint filings can be useful where a debtor-in-possession lender located in one jurisdiction may wish to provide funds that will enable a restructuring to succeed. However, if the lender is unfamiliar or uncomfortable with the approval of their charge in a foreign locale being secured on the basis of a foreign recognition order, then in order for the lender to make an advance they may demand approval of their charge in their own jurisdiction. Although the certainty derived from a joint filing may be of great benefit to a nervous restructuring, the co-ordination required to make the process work and the requirement for material to be filed in the jointly filed jurisdictions, rather than merely having one main proceeding for which recognition is sought, can mean that a joint filing will be significantly more costly than separate insolvency proceedings. Thus, a consideration of the possible increased cost versus the benefit of co-ordination, control and certainty will determine the desirability of a joint filing. Nevertheless, sometimes multiple plenary proceedings occur, which can cause complications and conflicts. Cross-border protocols help mitigate potential challenges by establishing guidelines for the insolvency procedures to be followed. The protocols are usually drafted by a debtor and the insolvency professionals, and court approval is then sought. In view of the aim of the protocols to ensure co-ordination, it is prudent to obtain court approval by way of a joint hearing so that the courts themselves may communicate and resolve issues in one sitting. The cross-border protocols can cover any issue related to the restructuring, with the more obvious matters being those relating to recognition of stays, claims processes, debtor and creditor representation, debtor-in-possession finance, approval of sale of assets and of a restructuring plan. 13

14 CONCLUSION The impact of insolvency remedies on international business and technology is that the business community may trade and invest in foreign jurisdictions, comfortable in the knowledge that there is legal certainty and fair administration of competing rights. A reliable and trustworthy insolvency system underpins a developed economy by providing certitude to investors. Israel is not just anticipated to be the next Silicon Valley but has already been at the forefront of technological advances in solar energy, water conservation, hydroponics and solar energy usage. Thus, even though Israel has sought to recognise and accept foreign proceedings in the last decade, it may be time for Israel to formally adopt the Model Law to safeguard co-operation between the courts and authorities in cases of cross-border insolvencies, to enable recognition of foreign proceedings, and to permit equitable and efficient administration of insolvency entitlements and enforcement rights. Adoption of the Model Law will aid Israel in being considered a mature and responsible economy. Disclaimer The views and opinions expressed in this paper are those of the author and do not necessarily reflect the views and opinions of Farber Financial Group. About the Author Michael Baigel is a Licensed Trustee in Bankruptcy with the Canadian financial advisory services firm of Farber Financial Group, which provides a variety of services to businesses, including insolvency and restructuring. He is a Chartered Insolvency and Restructuring Professional in Canada and also a UK qualified Insolvency Practitioner. Other specialty services provided by Farber include corporate finance, M&A/transaction advice, turnaround management, CFO resources, interim management, and fraud, forensic and asset recovery. For more information please visit: 14