LESSONS FOR THE DEVELOPMENT OF SINGAPORE'S INTERNATIONAL INSOLVENCY LAW

• Citation: (2011) 23 SAcLJ 932
• Date: 01 December 2011
• Published date: 01 December 2011

This article argues that Singapore's international insolvency law is outdated and makes some suggestions for its reform. Drawing on the established conflicts methodology of choice of jurisdiction and choice of law, it gives a new exposition of the theories of universalism and territorialism. This forms the backdrop to an examination of the history of the ring fencing provision of s 377(3)(c) of the Companies Act and recent international developments. The article contends that, from both theoretical and practical perspectives, it is in Singapore's interest to repeal s 377(3)(c) and enact the UNCITRAL Model Law on Cross-Border Insolvency.

I. Introduction

1 Multinational companies are ubiquitous in most developed economies today. They play important roles in promoting trade and investments between different countries of the world. When they do well they help to generate jobs and wealth. But competitive forces in the market place mean that sometimes the less successful ones will fail. When a multinational company becomes insolvent it gives rise to an international insolvency1 as it will have assets or debts in more than one country. Each of these countries concerned will naturally want to lay claims to the assets of the company, especially where they are found within the jurisdiction of the country, or to have a say in the conduct of the insolvency proceeding or part thereof. Almost invariably these countries will have different insolvency laws. The conduct of an international insolvency may therefore give rise to difficult problems of how to mediate the conflicting claims of the countries involved and the interaction of the different laws. A main object of international insolvency law is to develop the theories, doctrines and rules of law to ensure that an international insolvency is conducted in an efficient, fair and just manner for the benefit of the creditors and possibly other stakeholders of the insolvent company. This will usually require

co-operation and co-ordination between the different courts and officeholders in the countries having an interest in the insolvency.

2 Singapore's international insolvency law is underdeveloped and out of line with recent international developments.2 The main reason for this unsatisfactory state of affairs is the existence of s 377(3)(c) of the Companies Act.3 It ring-fences the Singaporean assets of a foreign company that is registered under the Act to pay the debts and liabilities incurred in Singapore by the foreign company before the balance, if any, is transmitted to the liquidator of the foreign company for the place where it was formed or incorporated. This is a territorial approach to an international insolvency that is contrary to the recent emphasis on co-operation and co-ordination in the measures adopted by various countries to reform their international insolvency laws. Singapore has not adopted any of these measures.

3 Just as the domestic insolvency law is part of the package of commercial and corporate laws affecting a country's economic competitiveness, so is its international insolvency law. Our dependence on trade with and investments in or from other countries to generate growth and the close integration of our economy in the global economy mean that we should be well prepared to cope with any international insolvency that may arise. There is an urgent need to modernise our international insolvency law.

4 The main purpose of this article is to draw lessons from some recent developments in the theories and practices of international insolvency law. It begins by discussing the two theories of universalism and territorialism through unpacking the positions they take on the two building blocks of choice of jurisdictions and choice of laws. Next, it argues that universalism should be preferred over territorialism. It then examines some recent developments, viz, the United Nations Commission on International Trade Law (“UNCITRAL”) Model Law on Cross-Border Insolvency, the EC Regulation on Insolvency Proceedings, and the recent House of Lords decision in Re HIH Casualty and General Insurance Ltd.4 After that it traces the historical background of s 377(3)(c) and contends that it should be repealed, followed by arguments on why it is in Singapore's interests to adopt the UNCITRAL Model Law on Cross-Border Insolvency. The article concludes with suggestions on the steps to take to reform Singapore's international insolvency law.

II. Universalism and territorialism

A. Introduction

5 There is as yet no universal agreement on the terminology used to describe the theories. English academics tend to use the more traditional terms of universality and territoriality,5 whereas their American counterparts use the newer terms of universalism and territorialism. Since the debates on the theories have been most intense in the US, this article will follow the American usage.

6 There are two broad, established theories to international insolvency law: universalism and territorialism. In recent years, contractualism has been proffered as an alternative.6 It is an extension to the international level of the contractual theories of bankruptcy. As this new theory is not as influential as the two older theories, this article will not discuss it. At the most basic level, territorialism envisages that each country will seize local assets and apply them for the benefit of local creditors, with little or no regard for foreign proceedings. By contrast, universalism advocates that a court administers the bankruptcy of a debtor on a worldwide basis with the help of other courts in each affected country. It will be seen shortly that pure versions of universalism and territorialism represent the extreme ends of a spectrum within which different shades of territorialism and universalism have been developed. In practice, the real battle is fought between modified territorialism and modified universalism.

B. Traditional exposition

7 The traditional way of explaining the theories of international insolvency law is based on two pairs of antithetical propositions.7 One pair juxtaposes the principle of “unity of bankruptcy” with its opposite, that of plurality. The other pair addresses the issue of the effects of insolvency proceedings opened under the law of a given state, and places the principle of “universality of bankruptcy” in opposition to that of “territoriality”.

8 It is said that under the unity or unitary principle, there should only be one set of proceedings, recognised throughout the world, which should deal with all the company's assets and all the creditors' claims. This jurisdiction can be the company's state of incorporation, its principal place of business or its centre of main interests. This principle, if strictly adhered to, would preclude any subdivision of insolvency proceedings into two or more distinct administrations governed by the laws of separate states, although it seems that this does not extend to prohibiting all decentralisation so that even ministerial or administrative acts may not be carried out in other jurisdictions. The opposing principle of plurality admits of concurrent proceedings in different jurisdictions, based on some connecting factor such as assets, a place of business or creditors within the jurisdiction.

9 The other pair of propositions is universality and territoriality. The principle of universality advances the claim that an insolvency proceeding has worldwide effect over all the assets of the debtor, wheresoever these may be found. The principle of territoriality, on the other hand, argues that the effects of insolvency proceedings are confined to such property as is located within the territory of the jurisdiction in which the proceedings are opened, and carries no consequences with respect to foreign assets of the debtor.

10 The two pairs of antithetical propositions are linked. If the jurisdiction claimed by the courts of the different states involved in an international insolvency is only territorial, this necessarily means that there will be a plurality of proceedings. However, the reverse is not necessarily true. Multiple proceedings may not mean that the court of each state regards its own competence as only territorial. In fact, the more usual approach is one whereby a state regards its own, domestic bankruptcy laws as producing universal effects, particularly if the debtor's relationship with the country is a close one which enables the case to be classified as a “domiciliary” proceeding. But the State applies the notion of territoriality towards foreign proceedings involving debtors with assets which lie within the jurisdiction of the State. This enables the State to deny the capability of the foreign proceedings to produce any effects regarding those assets, thus enabling local actions to be taken with regards to the assets.

11 If examined carefully, it can be seen that the principle of unity or plurality on the one hand and that of universality or territoriality on the other are actually concerned with whether an international insolvency is run by a single forum or multiple forums, and whether a single law or multiple laws govern most aspects of the insolvency case, respectively. In other words, they relate to the issues of choice of forum and choice of law respectively. The concepts and terminology of forum and governing law are well established in conflict of laws. They are more readily understood compared to the old terms of unity/plurality and universality/territoriality and will be used to analyse the theories of universalism and territorialism.

C. New exposition – Forum and governing law

12 The best way to understand the various theories that have been propounded is to unpack them and examine the two factors that are the building blocks of the theories. The interaction between the two factors determines the extent to which the theory is closer to universalism or territorialism. The...