International Bankruptcy: The Challenge of Insolvency in a Global Economy

International Bankruptcy: The Challenge of Insolvency in a Global Economy

by Jodie Adams Kirshner

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Overview


With the growth of international business and the rise of companies with subsidiaries around the world, the question of where a company should file bankruptcy proceedings has become increasingly complicated. Today, most businesses are likely to have international trading partners, or to operate and hold assets in more than one country. To execute a corporate restructuring or liquidation under several different insolvency regimes at once is an enormous and expensive challenge.
With International Bankruptcy, Jodie Adams Kirshner explores the issues involved in determining which courts should have jurisdiction and which laws should apply in addressing problems within. Kirshner brings together theory with the discussion of specific cases and legal developments to explore this developing area of law. Looking at the key issues that arise in cross-border proceedings, International Bankruptcy offers a guide to this legal environment. In addition, she explores how globalization has encouraged the creation of new legal practices that bypass national legal systems, such as the European Insolvency Framework and the Model Law on Cross-Border Insolvency of the United Nations Commission on International Trade Law. The traditional comparative law framework misses the nuances of these dynamics. Ultimately, Kirshner draws both positive and negative lessons about regulatory coordination in the hope of finding cleaner and more productive paths to wind down or rehabilitate failing international companies.

Product Details

ISBN-13: 9780226531977
Publisher: University of Chicago Press
Publication date: 05/10/2018
Edition description: New Edition
Pages: 288
Product dimensions: 6.00(w) x 9.00(h) x 0.90(d)

About the Author


Jodie Adams Kirshner is research professor at New York University and a lecturer in international bankruptcy law at Columbia University Law School. She has also served as a technical advisor to the Bank for International Settlements and worked as an independent consultant for financial funds investing in distressed debt.

Read an Excerpt

CHAPTER 1

Why Have So Many Bankruptcies Crossed Borders?

Recently an advertisement aired on Thai television that proclaimed, "The Bacardi family didn't just survive — we thrived," as a figure walked in a Cuban streetscape. Labels on bottles of Bacardi rum have showcased the Cuban history of the Bacardi spirits company. In fact, however, the company has expanded so far beyond its Cuban roots, and participated in such a complex web of markets, brands, suppliers, affiliates, and wholly owned subsidiaries, that today the company is only minimally connected to Cuba.

The forces of globalization have enabled Bacardi to grow internationally, far beyond the country of its origin, and the company has developed into a complex network of subsidiaries. The company sells more than two hundred brands, in more than one hundred markets around the world. The board chairman, the great-grandson of the founder of the company, has never been to Cuba. He lives in Miami, and the company currently has its headquarters in Bermuda and holds its trademark in Liechtenstein.

In 1830, the Bacardi family emigrated to Cuba from Spain and, eventually, began to adapt Cuban rum to appeal to a more international market. The new Bacardi company bought a distillery in Cuba in 1862 and commenced acquiring sugarcane fields. It shipped the rum it produced to the Spanish royal family, one of its early customers.

From its base in Cuba, Bacardi began to expand abroad. In 1920, Bacardi became the first Cuban multinational company when it established a bottling facility in Barcelona. The company soon set up another bottling operation in New York and opened a Mexican subsidiary. After the repeal of Prohibition in the United States in 1933, Bacardi aggressively entered the US market. The company sold eighty thousand cases of rum in the United States in 1934.

Establishing additional subsidiaries helped Bacardi to qualify for advantages in trade. The company moved its trademark from Cuba to the Bahamas, in order to benefit from British Commonwealth preferences. In 1937, it established a subsidiary in Puerto Rico in order to access US markets without paying US import duties.

These international outposts became increasingly significant after Castro moved to nationalize private enterprises in Cuba. The Bacardi trademark, safe in the Bahamas, remained the private property of the company, while the chief executive of the company continued running the business from a boat in the Atlantic. He docked the boat in Miami to hold in-person meetings. The company ultimately reconstituted itself as Bacardi & Company Ltd. in the Bahamas. It also formed Bacardi International Ltd., headquartered in Bermuda, with separate areas of responsibility.

From these foundations, Bacardi has worked to globalize further its manufacturing and customer bases. Over time, Bacardi has supplemented its factories in Mexico and Puerto Rico with manufacturing facilities in the Bahamas, Mexico, Puerto Rico, Spain, Brazil, Canada, Martinique, Panama, and Trinidad. It has bottled the rum produced in these locations at plants in Australia, Austria, France, Germany, New Zealand, Switzerland, the United Kingdom, and the United States. To expand into new markets, the company has formed alliances with partners in Hong Kong, Japan, Malaysia, the Philippines, Russia, Taiwan, and Thailand.

More recently, Bacardi has undertaken several mergers in order to participate in the international markets for other spirits, in addition to rum: Bacardi has, for example, acquired the Italian vermouth producer Martini and Rossi, the Scottish whiskey and gin producers Dewar's and Bombay Sapphire, the Mexican Tequila producer Cazadores, the French vodka producer Grey Goose, and the New Zealand vodka producer 42 Below. Through these acquisitions, Bacardi has gained contracts, suppliers, distribution networks, and foreign assets that originally belonged to the target companies.

The expansion of Bacardi into a complex, international corporate group is not unique. Increasing numbers of companies also have expanded both horizontally and vertically. Along the horizontal axis, the companies have broadened their multinational reach and operated across more territory in order to enlarge their markets, gain trading partners, and access new capital. Along the vertical axis, the companies have established chains of linked companies, many of which also have operated transnationally, in order to shield assets within separate subsidiaries, reduce their tax liabilities, ensure supplies of inputs, and exploit the benefits of local incorporation, among other advantages.

Answering the question of why bankruptcies increasingly have raised cross-border issues therefore requires a detailed look at developments along both the horizontal and vertical axes. The chapter will trace the general trend of the increasing multinational reach of companies and the proliferation of enterprise groups. The chapter will explain the history of these expansions and the reasons for companies to continue to grow in these ways.

Development 1: The Internationalization of Business

The commercial world has globalized. Domestic companies now have multinational trading partners, as well as operations and assets in many countries. Companies have needed to open new markets in order to grow. As they have required increasing amounts of raw materials, capital, and labor, pressure has intensified to contract with additional international sources. These trends, although not new, recently have accelerated, facilitated by parallel developments in technology, free trade and regional trade blocs, international finance, and the falling cost of international transportation.

INCENTIVES TO INTERNATIONALIZE

The essential task of a company is to engage in value-creating activities, by converting inputs into outputs of higher value. A company earns a profit when it sells its outputs at a price higher than the cost of its inputs. To maximize the profit, a company generally will seek to reduce the cost of its inputs and sell more of its outputs. Usually, a company will increase the volume of its outputs until the revenue from one additional output falls below the cost of producing it.

Transacting for inputs internationally often enables a company to obtain the inputs at a lower cost, and selling outputs in international markets often enables a company to increase its revenues by selling more outputs. The lower cost of the inputs may offset the transaction costs involved in sourcing them from abroad. A larger market also may introduce advantages that arise from spreading costs over a greater number of outputs, a concept referred to as economies of scale. The consulting company Boston Consulting Group, for example, has demonstrated that doubling output can reduce production costs by as much as 30 percent.

Three broad categories of inputs may be available internationally. First, a company might seek physical resources, such as minerals, raw materials, agricultural products, or financial capital. Each may be more expensive in the home country of the company, or it may not be available there at all. Bacardi, for example, has produced Scotch whiskey by obtaining from Scotland resources that would not be available in the Bahamas or Bermuda. Second, a company might seek to save money on labor, particularly a company in the manufacturing or services industry. The Japanese clothing company Uniqlo, for example, has outsourced manufacturing of its clothing to factories in China because wages in China are lower than in Japan. Third, a company might look abroad for specialized services, such as technological capabilities, marketing expertise, or legal advice. Bacardi, for example, contracted with the Spanish tennis player Rafael Nadal to promote the company in its social responsibility campaigns.

Three primary strategies for entering international markets may be available to a company. First, a company might license a foreign entity to sell its products in a foreign location. Bacardi, for example, has created an alliance with Anheuser-Busch to develop, market, and distribute its Bacardi Silver brand in the United States. Second, a company might partner with overseas distributors and retail outlets. The retail shops East End Cellars in Australia and Killis Getränkehandel in Austria, for example, sell Bacardi Limón. Third, a company might open its own foreign outlets. Bacardi does not have retail stores, but the Japanese clothing company Uniqlo, for example, owns all of its own stores. When Uniqlo opened a flagship store in Seoul, South Korea, the company set a record for the highest one-day sales in the country on its first day in operation.

ELEMENTS OF INTERNATIONALIZATION

The relationships that a company enters in order to secure inputs and sell outputs all have the potential to cross national borders. Consider for example the numerous relationships that the production and sale of a hypothetical bottle of rum might entail: Company 1 might purchase the recipe for the rum from Company 2. The rum might be produced by Company 3, which might employ people at a distillery in Mexico. Company 4 might bottle the rum, Company 5 might distribute it, and Company 6 might market it. Companies 7 and 8 might lend money to finance the production of the rum and might sell the debt to other companies downstream. Companies 9 and 10 might sell the rum at their retail stores. Company 11 might provide legal advice, and Company 12 might create an advertising campaign. Company 13 might own the distillery where the rum is produced, and Company 14 might own the equipment. Companies 15 and 16 might have exclusive contracts to market the rum in Asia. Company 17 might purchase the rights to produce and sell the rum in Canada and might contract with companies 18, 19, and 20 to market and distribute it there. Company 21 might keep the accounts and manage the cash flow. Finally, Company 22 might be responsible for travel, communications, and logistics. These relationships illustrate factors that potentially contribute cross-border elements to a bankruptcy. Foreign assets, foreign trading partners, foreign creditors and contracts, foreign shareholders, and foreign operations all can make a bankruptcy international.

Foreign Property

When a company enters bankruptcy, it likely will own assets or other property located outside of the jurisdiction, which creditors will want to recoup. The Bacardi company, for example, owns eight production facilities in Scotland. In 2008, Bacardi acquired its Japanese distributor, which owns assets in Japan. Bacardi's competitor, the French conglomerate Pernod Ricard, owns agave fields in Mexico that supply the agave that forms the principal ingredient in tequila.

Foreign Trading Partners

Second, companies that enter bankruptcy may have had dealings with parties in other countries, through either engaging in trade or carrying on business beyond domestic borders, and the parties may become involuntary creditors. The dealings also may have tied up assets in foreign locations that other creditors will want to recover. The UK firm WPP Group, for example, produces advertising for Bacardi, and the Danish firm Bryggerigruppen sells and distributes Bacardi products in Denmark. WPP Group would become a creditor of Bacardi until it received payment, and planned advertising campaigns could constitute an asset of Bacardi. Bryggerigruppen could have a store of excess Bacardi products awaiting sale in Denmark, all of which would be assets.

Foreign Finance and Contracts

Third, insolvent companies may have borrowed money from creditors in various countries, or they may have signed contracts governed by foreign law. As companies have had to fund more complex research and development and sustain high levels of technological capability, they have required more capital and generally have sought it from the cheapest source. In 2013, for example, Bacardi raised money on the euro bond market, with the help of fourteen international investment banks. The Russian metals company Mechel arranged a $1 billion syndicated loan from the foreign banks ING, Société Générale, UniCredit, Commerzbank, and Raiffeisen.

In addition, employment contracts, supply contracts, service contracts, and joint venture contracts, among other agreements, all might specify foreign law or foreign jurisdiction. Bacardi, for example, has employees in close to thirty countries, and national wage and hour law applies to the employment contracts of locally hired employees as well as expatriates working within the host country. British-American Insurance (Kenya) Ltd. entered contracts with a Lebanese company and a Kenyan company to insure the construction of a power plant in Kenya and entered reinsurance contracts with Swiss Re, Munich Re, and Africa Re. The contracts stated that they would "be governed by and construed in accordance with the law of England and Wales[,] and each party agrees to submit to the exclusive jurisdiction of the Courts of Kenya."

Foreign Shareholders

In addition, shares in a company may have passed into the hands of foreign owners, and in bankruptcy the shareholders would become creditors. Bacardi is private and family held; its competitor, Diageo, by contrast, is listed on both the London Stock Exchange and the New York Stock Exchange. Its shareholders include several Canadian investment funds such as Mawer International Equity, Manulife World Investment Class, and Value Partners Investments. Diageo, in turn, holds shares in East African Breweries Limited, which is based in Kenya and listed on the Nairobi Stock Exchange, the Uganda Securities Exchange, and the Dar es Salaam Stock Exchange.

Foreign Operations

Finally, insolvent companies may have moved administrative or production functions to countries where labor costs or rents are cheaper, which could result in additional foreign assets, trading partners, creditors, and contracts. On the basis of fluctuating market demand, Nike Corporation contracts with South Korean subcontractors to produce and assemble its shoes in Indonesia on an Indonesian wage scale, creating a series of international employee relationships that could result in international employee-creditors and the accumulation of assets in Indonesia. The Brazilian shoe company Schmidt Irmãos Calçados imports leather to assembly factories in Nicaragua and exports the finished shoes to the United States. The iPad tablet device sold by Apple contains more than 450 components sourced internationally and assembled in China through a Taiwanese subcontractor, FoxConn.

ACCELERATING TREND TOWARD INTERNATIONALIZATION

The elements of increased internationalization are not new, but the trend toward internationalization has accelerated since the 1950s, as a result of changes in global infrastructure. Beginning in the Han Dynasty in 206 BC, the Chinese traded along the four-thousand-mile Silk Road through Asia. Tasked with stretching the influence of the crown and adding to its resources at the start of the seventeenth century, the Dutch East Indies Company established sugar plantations in Latin America and East India,and the British East India Company traded basic commodities throughout India, China, the North-West Frontier Province, and Baluchistan. More recently, the rise of information technologies, converging consumer tastes, expanding trading blocs, international investment flows, and low-cost transportation have facilitated increases in economic openness and geographic integration. Companies have gained more choice in where to obtain inputs, where to locate production facilities, where to seek funding, and where to market their final products.

Technology

Advances in technology have reduced geographic barriers. Communications can now move faster than people can travel, and satellites and fiber-optic cables have made transmitting information nearly costless. The Internet has connected people and markets more closely, shrinking physical distances and making it possible for companies to buy and sell in an instantly international marketplace. As digitization substitutes virtual flows of people for physical flows, companies can more easily engage with other firms to carry out activities jointly. Technology, for example, has made it possible for programmers at Indian information technology companies such as Aura Teknology and Online Productivity Solutions to assist foreign companies from India, freeing foreign companies from providing the service in-house.

(Continues…)


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Table of Contents



Acknowledgments
Introduction: Why a Book on International Bankruptcy Law?

1          Why Have So Many Bankruptcies Crossed Borders?
2          What Problems Have the Cross-Border Developments Caused?
3          What Questions Must the Law Answer in Cross-Border Bankruptcies?
4          What Have Efforts to Harmonize Answers Accomplished?
5          In the Absence of More Harmonization, What Other Developments Have Taken Place?

Conclusion: Where Do We Go from Here?
Notes
Index

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