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Bankruptcy jurisdiction in the US and Europe: reconsideration needed

Well-developed systems of bankruptcy law incorporate the cultural choices of the societies in which they operate, says Freshfields Bruckhaus Deringer. The UK, for example, is generally thought to be a creditor-friendly jurisdiction because it provides for mandatory set-off in insolvency, generally permits providers of finance to protect themselves from the consequences of a debtor’s insolvency and knows nothing of debtor-in-possession proceedings akin to Chapter 11, preferring to put the debtor’s affairs into the hands of an insolvency officeholder.

That this is the case is hardly surprising given the lack of concern for the welfare of debtors in the UK over the ages.

In the US, in contrast, the right of a debtor to rehabilitate itself has for generations been seen as superior to the right of a creditor to seek and obtain repayment in full of what it is owed. Traditional providers of finance seem to be less important and the universal operation of the automatic stay in Chapter 11 is the cornerstone of US restructuring practice.

The differing approaches to the balance between rights of creditors and debtors is mirrored in the connection required to found bankruptcy jurisdiction. In the US, the connection required (at least to non-US eyes) is very slight; throughout the EU it has historically been much more substantial. Yet the consequences for stakeholders of all descriptions of the jurisdictional choice made by or imposed upon a debtor are in both cases enormous.

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© Freshfields Bruckhaus Deringer 2005. Reposted on AltAssets with permission.