Two Cheers for Territoriality: An Essay on International Bank Insolvency Law

A universal insolvency system has been the international trend, or at least an aspiration, over the past few decades. Under universal insolvency, one jurisdiction distributes assets to claims or runs the reorganization. The rest collect assets, coordinate claims processing, and share information with the principal jurisdiction, and enforce moratoria. The first move toward universality occurred in 1978, with the ancillary proceeding of Section 304 of the Bankruptcy Code. The basic concepts of territoriality and universality are reviewed, the world of regulated financial firms, notably, but not exclusively banks, are examined. An iron-clad conclusion is that financial services are different, and these differences are relevant to insolvency. Universality might be best for general business firms. However, this proves nothing for banking or other financial services. The debatable conclusion is that everybody is advocating the best insolvency rules for their own insolvency system. The UNCITRAL Model Law of Cross-Border Insolvency is appropriate for general insolvency and correctly permits an exception for financial firms.