Elon's Brazilian Corporate Law Surprise

Elon Musk has just learned that Brazil doesn't give a lot of credence to the fictions of corporate asset partitioning:  affiliated companies can be liable for each other's involuntary obligations.  This shouldn't be a surprise; Mariana Pargendler's work has made clear that Brazil's got a very different approach to corporate law than the US. In particular, limited liability isn't so strongly fetishized. Now if we only had some sort of legal doctrine in the US that ignored limited liability...

Man Bites Dog, or Debt Collector Restructures Its Distressed Debt

I couldn't let this one pass without noting it. The largest debt collection company in Europe has found itself on the other end of the dunning letter. Swedish debt collection company Intrum has achieved majority (barely) support for a deal with bondholders to swap 10% of its $5.8 billion debt for equity and push out the maturity of remaining notes. Intrum found itself in this mess after "years of borrowing heavily in the low-interest era to buy portfolios"--that is, to buy bunches of distressed debt owed by strapped borrowers all over Europe, which Intrum would then squeeze for repayment at a higher rate than Intrum had paid. Or so Intrum hoped. Apparently this investment strategy went sour after "a slowdown in its business." Hmmm. What an interesting euphemism! Borrowers resisting collection pressure more resolutely now? I wonder if the growing wave of personal insolvency procedures across Europe has contributed to this "slowdown" for Intrum's debt collection efforts. Good news for borrowers is bad new for the debt collector!  

Long-run (positive) effects of personal debt relief

Empirical papers on the long-run effects of a personal bankruptcy relief system (i.e., discharge) are rare, so this fascinating new paper caught my eye. The first personal insolvency discharge system in continental Europe appeared in Denmark in 1984, and this paper takes advantage of that long lifespan to mine some rather unique data. The results are unsurprising but very useful in the ongoing debate about the salutary effects of such procedures: "debt relief leads to a large increase in earned income, employment, assets, real estate, secured debt, home ownership, and wealth that persists for more than 25 years after a court ruling." So the benefits of debt relief are not only substantial but robust, as debtors learn their lesson (if there was one to learn) about managing their finances, and they capitalize (literally) on their fresh start. Perhaps most important, the cause of these effects seems to be largely the desired result of any personal discharge system--getting debtors out from under the debilitating thumb of hopelessly unserviceable creditor demands and reactivating them as engaged workers and taxpayers: "The net transition of workers into employment accounts for two thirds of the increase in earned income." Great contribution to the literature on personal insolvency and well worth a read.

Cross-Border Insolvency Forum Shopping Naivete

by Ted Janger and John Pottow

Recently, two U.S. law professors and a third from Singapore offered unsolicited advice to the United Nations Commission on International Trade Law (“UNCITRAL”) regarding that organization’s ongoing efforts to harmonize and modernize the law of cross-border insolvencies.  They wrote an open letter (the “Letter”) to the Secretariat—joined by a number of other academic signatories—that calls upon UNCITRAL to abandon one of the core principles of its Model Law on Cross Border Insolvency (the “MLCBI,” adopted as chapter 15 of the U.S. Bankruptcy Code): that, other things being equal, a cross-border bankruptcy case should be based where the debtor is located. 

This principle is implemented by according special deference and comity to the insolvency case located at the debtor’s center of main interest (the “COMI”).  The debtor’s COMI is the jurisdiction where it carries out its activities and, hence, is the jurisdiction that is known and readily apparent to third parties.  It therefore is predictable.  The COMI principle thus has a lot to recommend it.  In most cases it will enhance the legitimacy of bankruptcy outcomes by simultaneously furthering administrative convenience, increasing transparency, vindicating creditor expectations, and respecting national sovereignty.  Like most rules of private international law, it is rooted in common sense.

Notwithstanding COMI’s many virtues, the Letter’s authors recommend jettisoning COMI in favor of a regime of unfettered forum choice and jurisdictional competition; the main proceeding entitled to deference in a multinational insolvency should be freely selected by the debtor.

Creative Destruction in Small Business Bankruptcy

Two distantly related items caught my eye this morning, as both reinforce the need for "creative destruction" as a response to all-too-common small business failure.

The first was a NYT piece on the travails of a female entrepreneur in China. It tells a heart-wrenching story of a system in which the state brutally represses honest but unfortunate debtors, including via the infamous blacklist that prevents defaulters from using air and train travel (effectively curtailing re-entry into business, even if financial and economic factors might otherwise allow this). This is a story about what it looks like when there is no bankruptcy backstop, no reset button to start fresh and undertake a new venture with the hard lessons of failure firmly in mind.

The other item explores the transition from such an unforgiving system--in Spain--after the introduction of a discharge for (most) small business debt. The linked Bank of Spain working paper offers further evidence of the salutary effects of small business bankruptcy that discharges individual entrepreneurs and encourages them to restart. The reform fostered the "creative destruction" of these entrepreneurs' ventures, with the failed firms exiting the market (rather than lingering as productivity-depressing zombies), which "leads to technological change and higher productivity growth" as "the introduction of the fresh start policy promoted firm creation among Spanish micro-firms, especially in companies with a high share of intangible assets, which are likely to be involved in innovation activities, and in sectors with high productivity." Nicely linking the two contrasting accounts from China and Spain, the Bank of Spain paper concludes, "This finding also suggests that a starkly pro-creditor personal bankruptcy law with no real fresh start, like the Spanish one before 2015, may be an important barrier to entry for small businesses." Indeed.

It still surprises me that lawmakers around the world continue to resist this long-established truth for small business, powerfully undermining the most important driver of economic development worldwide. Worse yet, the mere introduction of a personal bankruptcy law with a debt discharge is not enough--the system actors have to actually support a fresh-start policy rather than actively undermining it, which turns out to have been the disappointing result of the first two years of such a system in Shenzhen, China. One hopes that national legislatures, like small entrepreneurs, can learn from failure and move forward with proper personal bankruptcy laws when given a fresh opportunity to do so.

New Year, New Personal Bankruptcy Law--in Kazakhstan

The list of countries with new personal insolvency laws continues to grow. Bloomberg noted today that the President of Kazakhstan had signed a new law setting out several procedures for relieving the debts of non-entrepreneur individuals (sole proprietors remain relegated to the existing law on rehabilitation and bankruptcy). The text of this 30 December 2022 law is here (in Russian only), and most of its provisions will become effective in 60 days, around March 1, 2023. 

The structure of this law and its four pathways to relief are clearly inspired by the 2015 law of Kazakhstan's northern neighbor. This indicates a continuing trend, as new personal insolvency laws are generally based on a model from the law of a country the adopting country respects, and the model in this case is a fairly good one (the parent law is described here and here). The Kazakh law differs in some respects from this predecessor model, but the basic system is the same: (1) a no-asset procedure ("out-of-court bankruptcy") providing a simple discharge to debtors with debt below about $11,000 (i.e., 1600 "monthly calculation units," which for 2022 was KZ₸3063, just over US$7, so 1600 x $7 = $11,200), (2) a 5-year payment-plan procedure ("restoration of solvency") for debtors with regular income who choose to propose a 5-year plan for court (not creditor) approval, (3) a traditional liquidation-and-discharge procedure ("judicial bankruptcy") unfolding over six months and leaving the debtor with exempt property, including a sole residence, and (4) a settlement option ("amicable agreement") for debtors who manage to convince their creditors to agree to a private compromise (read: never!).

While the requirements for accessing the no-asset out-of-court bankruptcy procedure seem wildly unrealistic and uniquely austere (no property of any kind!?), the new Kazakh system is fairly well structured. Judging by the northern neighbor's recent experience with its very similar set of procedures, it seems most likely the payment-plan procedure will be selected by very few debtors, and the courts will reject the unviable plans of the few debtors who try to pursue this route. Judicial bankruptcy will become the main pathway to relief, which seems to be within reach for ordinary Kazakh citizens. Eventually, the extremely restrictive access requirements for out-of-court no-asset bankruptcy seem likely to be relaxed--either in practice or in a first round of law reform--and that procedure will become the workhorse for the personal bankruptcy system.

Yet another laboratory to observe the effects of the messy compromises that create personal insolvency procedures--and thank goodness, yet another large population of debtors who finally have access to legal relief from debts that would otherwise hound them and their families forever, with no hope of recovery. The new year brings new hope for such families in Kazakhstan!

Ukraine versus Russia, English Supreme Court

Bailiffs for Gunboats is the title I have given to a short paper to be published in a Festschrift for the famous German scholar, Christoph Paulus, lately head of the law faculty at Humboldt, Berlin. It discusses a case remarkably overlooked despite its unusual facts, its major legal and political implications, and its role as a prelude to the horrors of the current war in Ukraine.

The case of Ukraine v. Russia (“Ukraine-Russia”), pending decision in the Supreme Court of England for more than three years, lies at the intersection of traditional public international law and private international law. It presents the question of court enforcement of a debt that is intertwined with sovereign political relationships. More broadly, it reflects the great power that private enforcement of a commercial instrument may nowadays give to a creditor that has goals beyond repayment. In the special context of a sovereign creditor of a sovereign debtor, the case reveals the potential role of privately enforceable debt in achieving the creditor’s political ends.

Contract Ambiguity: Paying Versus Still Owing a Debt

I've been meaning for some time to tell this brain-candy story involving an amazing ambiguity in a Chinese debt-related contract. Now that my career-first research semester is drawing to a close and the holiday break is upon us, I thought now's the time to tell it.

To set up the story, the equivalent of the legal-cultural Latin phrase pacta sunt servanda (debts are to be paid) in Chinese is 欠债还钱 (qiàn zhài huán qián) [the phrase continues, but this is the key bit]. It means "If you owe a debt, return the money." Here's where the craziness comes in: Most Chinese characters have one and only one single-syllable pronunciation. That syllable might have many diverse meanings, but how that character sounds is consistent.

Not so with the key character in the above phrase. The character 还 can convey the sound huán, in which case it means "return," or more frequently, it carries the sound hái, which means "still" (that is, carrying on, as in "I still love him despite his sometimes beastly behavior").

Personal Insolvency in Asia and Currency Comparison

While Shenzhen has gotten all the good press since its March launch of the first personal bankruptcy regime in Mainland China, a number of other Asian regimes have also been on the move. I recently examined the rapidly developing personal insolvency system in Singapore, and others have done great work on the unique processes in Japan and Korea. As an outsider, I struggle to capture the real feeling of life under these procedures. The challenge is expressed brilliantly by my favorite article on the difficulty of examining legal phenomena that are utterly foreign to the examiner, a paper that sought to answer the question "what was it like to try a rat?" This struggle is particularly acute in a new paper I've just posted on the fascinating evolution of Shenzhen's new law from its roots in a little-known 2008 consumer insolvency law in Taiwan. The Taiwan law is still in effect, of course (as amended in important respects), and the rocky experience of its first decade offers important lessons for personal insolvency policymakers in Asia and beyond. In both Taiwan and Shenzhen, a potential continuing challenge that intrigues me is among the most important and impactful in any such law--the measure of "necessary" household expenses to be budgeted to debtors for the purgatory period of three years (in Taiwan, it's six!) preceding a discharge. Both Taiwan and Shenzhen chose the social assistance minimum income; basically, the poverty level. Taiwan recently increased this by 20% after years of criticism of forcing bankrupt debtors into the extreme austerity of living within these tight budgets. Shenzhen has decided not to go beyond the poverty level, at least for now.

Expressing the strictures of these poverty levels in useful comparative terms is really difficult for me. Official exchange rates are quite misleading when the question is "what is it like to try to make do on X [local currency units] for three years in [X country]?" Purchasing power parity exchange rates likely get closer to the mark, but with China, I'm not even sure that approach captures the pain (or ease) that debtors in the "discharge examination period" must endure. The figures I'm wrestling with are 1950 yuan in Shenzhen and about 18,000 new Taiwan dollars (15,000 x 1.2) in Taipei (less in the outlying areas). I vaguely understand these to correspond to about US$465 and US$600, respectively, per month, but this just seems untenable to me. How could anyone survive on these amounts for 36 months in Shenzhen or 72 months in Taipei? Granted, both sets of figures are per person, so a debtor caring for parents and/or children might end up with several multiples of these figures per month, but even then, supporting a family of four on US$1860 per month for three years in a major city like Shenzhen still strikes me as so austere as to dissuade people from seeking relief. Am I just out of touch with the reality of modern financial struggles generally (I know some low-income Americans also strain to make ends meet on somewhat similar budgets), or am I not understanding something about life in big-city China, or are the figures just not reflecting the feeling of life within these limits? Any insight would be greatly appreciated.

Human Rights Watch on Imprisonment for Debt

What happens in countries where no consumer bankruptcy regime exists as a safety valve to assuage the worst consequences of unpayable debt? A report this week from Human Rights Watch ("We Lost Everything": Debt Imprisonment in Jordan) offers one heart-wrenching answer. The following excerpt captures the essence:

Jordan is one of the few countries in the world that still allows debt imprisonment. Failure to repay even small debts is a crime that carries a penalty of up to 90 days in prison per debt, and up to one year for a bounced check; courts routinely sentence people without even holding a hearing. The law does not make an exception for lack of income, or other factors that impede borrowers’ ability to repay, and the debt remains even after serving the sentence. Over a quarter-million Jordanians face complaints of debt delinquency and around 2,630 people, about 16 percent of Jordan’s prison population, were locked up for nonpayment of loans and bounced checks in 2019.

The response from the Jordanian Ministry of Justice is well worth reading, and it concludes by offering some hope: "A committee is reviewing the Execution Law in such a way to ensure justice and account for the interests of both parties (borrower and creditor)." Let us hope that this review concludes as it has in many, many countries around the world in recent years--with a proposal for the adoption of a personal bankruptcy law, following the guidance of the World Bank and other international organizations.

Greensill "Secured" Lending

Slips readers will be interested in Matt Levine's column today, which takes a deep dive into the recently failed Greensill's lending against “prospective receivables,” which is kind of like lending against my prospective estate in Scotland. Both look a lot like unsecured lending.

Personal Bankruptcy Arrives in China in March 2021

The process I noted in an earlier post has come to fruition, and the Shenzhen special economic zone will introduce the first personal bankruptcy law in China, effective March 1, 2021. It will apply to a quite limited number of people (a total of about 12.5 million residents in Shenzhen three years ago, as of 2017, and one must have been a Shenzhen resident for three years to qualify for the new bankruptcy procedure), though by people, I mean real people, as it is not restricted to merchants or even business-related debts. This is a really powerful and bold step forward, and many have expressed concern about the payment-morality effects of such a liberal procedure for escaping from one's debts (the common phrase "lao lai" 老赖 means "debt dodger" or someone who evades responsibility).

That's why a discovery in the final text of the new law really struck me today. I was comparing the language from an early 2015 draft, the June 2020 draft, and the final version, adopted on August 26, 2020. The new word for "discharge" used for years in the earlier drafts was "mian ze" (免责), loosely, "free/excuse from responsibility." But between June and August, that term was replaced in over a dozen instances by a slightly different term, "mian chu" (免除), again loosely, "exemption/remission." In the couplet forming this new term, the character for "responsibility/duty" (ze 责) was replaced by a much less morally laden character carrying the meaning "get rid of, remove" (chu 除), which is more or less redundant with the meaning of the common first character (mian 免, excuse/waive). Neutralizing the concept of a discharge of debt to remove connotations of excusing someone from duty and replacing this with a sterile, redundant notion of simply removing (technical) liability struck me as an interesting rhetorical move.

I don't know if any ordinary Chinese person would perceive a difference here, but the US played this rhetorical game in the Bankruptcy Code by replacing the judgmental term "bankrupt" with the neutral term "debtor." This latest move to re-coin the new Chinese word for discharge seems to me to follow along those same lines. [Incidentally, I checked the Enterprise Bankruptcy Law, and neither term figures prominently in that law, which doesn't confer any discharge at all, so the Shenzhen authorities had to come up with a more or less new term.]

If you have a better sense of the potential emotional/rhetorical impact of this change, let me know what you think (I'm probably making too much of it, but it was an interesting twist).

New Greek Bankruptcy Code

Responding to an EU Directive and what was likely already a long-simmering plan to revise a not entirely satisfactory patchwork of constantly shifting bankruptcy and insolvency laws, the Greek government recently released a draft of a new Code for Debt Settlement and Second Chance. A webinar earlier this week hosted by Capital Link offered a rare insight into this developing legislation, introduced by the architects of the new law. If all goes as planned in the legislature, the new Code will become effective in 2021. Watch for much more of this type of activity in other European countries in the months ahead.

What's in a Word: New Immigration Public Charge Rule and "Bankruptcy"?

I was surprised to find that the explosive new US immigration "public charge" rule has some interesting bankruptcy angles. The rule is a thinly veiled attempt to reduce immigration to the US by non-wealthy individuals (i.e., the vast majority of applicants) by expanding the legal basis for "inadmissibility" based on the likelihood that the immigrant might at some point become a "public charge" drain on the US public welfare system (such as it is). The indirect bankruptcy angle is how similar this is to the BAPCPA means testing fiasco of 2005. Want to reduce access to a public benefit on the pretextual basis that it's being "abused"? Simply ramp up the formalistic application requirements! The new rule imposes a ridiculous and substantial paperwork burden on immigrants to demonstrate that they're not "inadmissible" as potential public charges, requiring completion of a means-test like questionnaire (with often only vaguely relevant questions) supported by a thick sheaf of evidence. The direct bankruptcy angle is ... one of the questions is about bankruptcy! Item 14 (!) asks "Have you EVER filed for bankruptcy, either in the United States or in a foreign country?" (emphasis in original). The thing that struck me about this question is that, of the small but growing number of non-Anglo "foreign countries" that have a system for providing debt relief to individuals, few call this system "bankruptcy." That word is reserved for business cases, creditor-initiated cases, a traditional liquidation not involving a multi-year payment plan, or some other distinction. Individual debt-relief procedures are often intentionally called something other than bankruptcy to signal these differences, reduce the stigma of seeking relief, and emphasize the rehabilitative function of the procedure. The public charge form (and instructions) betray no familiarity with this reality, even in the context of a follow-up question, "Type of Bankruptcy," with check-boxes for "Chapter 7," "Chapter 11," and "Chapter 13." Chauvinism, anyone? I guess I should be relieved that the ignorance of the drafters of this silly and odious new rule might have undermined the "bankruptcy" question, but that leaves honest immigration attorneys in a bit of a bind: do I prompt my client to answer "yes" and explain that her country doesn't have three "Chapters" or even "bankruptcy," but that her gjeldsordning procedure was the functional equivalent? Oh, I forgot--immigration from Norway is actually encouraged!

Debt Limits ... and Poison Pills

The Russian Duma last week adopted on first reading a bill that attempts to solve the biggest problem with the new Russian personal insolvency law, but the bill contains a poison pill provision that will all but kill its effectiveness if the bill makes it past the second and third readings and becomes law.  The problem lawmakers are trying to solve is that far fewer than the anticipated (and desired) number of overindebted individuals are seeking relief. While policymakers estimate a stock of nearly 800,000 potential debtor-beneficiaries of the new bankruptcy relief, only a small fraction have applied, mostly due to the prohibitive cost of the procedure. The obvious solution? Make it less expensive by cutting out the needless and counterproductive formalism, especially the court process. Well, while that message is clearly reflected in the new bill and its proposed solution, the poison pill is in a different and easy-to-miss access restriction: The proposed out-of-court procedure (run and financed by self-regulating organizations of insolvency trustees, a clever and unique approach) is available only to debtors with no seizable income or assets and less than 50,000 rubles (US$2000 PPP) in all bank accounts over the past three months ... and with a total debt burden of no more than 500,000 rubles (US$20,000 PPP, or about $10,000 using official exchange rates). The estimate of 800,000 expected debtors, by the way, includes only individuals with more than 500,000 rubles in debt, so this new bill will not make any headway at all toward solving the existing problem. The English bankruptcy system has struggled with a similar problem of overly complex and therefore expensive access, too, and the English have "solved" this problem in a similar way, by making light-admin Debt Relief Orders available only to debtors with debts below £20,000. English analysts have estimated that more than 75% of bankruptcy debtors meet the "no income, no asset" DRO restriction, like that in the new Russian law, but the debt ceiling excludes them from the cheaper and more efficient form of DRO relief. This is pernicious and counterproductive, as Joseph Spooner argues in his terrific new book (see pp. 122-30). What is the purpose of excluding no-income, no-asset debtors from an efficient bankruptcy procedure because they have too much debt? It is extremely disheartening that the otherwise very clever and progressive new Russian NINA procedure contains the seeds of its own undoing. The new clinic will not treat patients with anything more than a common cold.

Small Borrowers Continue to Struggle Without Relief

Several recent stories remind us that many, many ordinary people around the world continue to struggle with crushing debt with no access to legal relief, and when relief is introduced, it is vehemently opposed by lenders and often limited to the most destitute of debtors.  These stories also reveal the dark underside of the much-heralded micro-finance industry.

In Cambodia, micro-finance debt has driven millions of borrowers to the the brink of family disaster, as micro-lenders have commonly taken homes and land as collateral for loans averaging only US$3370. When many of these loans inevitably tip into default, borrowers face deprivation of family land, at best, and homelessness at worst. Actually, in the absence of a personal bankruptcy law (which Cambodia still lacks), things can get much worse. If a firesale of the collateral leaves a deficiency, borrowers might be coerced into selling their children's labor or even migrating away to try to escape lender pursuit. In the past decade, the MFI loan portfolio in Cambodia has grown from US$300 million to US$8 billion, about one-third of the entire Cambodian GDP! People around the world have turned to micro-finance to sustain their lifestyles (or just to survive) in an era of increasing government austerity, with disastrous results for many borrowers.

In India, the government continues to delay the introduction of effective personal insolvency relief, and it seems concerned with the interests of only the lending sector in formulating a path to relief for "small distressed borrowers." In a story that fills only half a page, consideration of individual or national economic concerns is not mentioned, but it is noted four times that discussion/negotiation with the "microfinance industry" has occurred, whose satisfaction seems paramount to law reformers. Among the "safeguards" put in place to prevent "abuse" of this new relief are (1) the debtor's gross annual income must not exceed about US$450 ($70 per month), (2) the debtor's total debt must not exceed about US$500, and (3) the debtor's total assets must not exceed US$280. While this may well encompass many poor Indian borrowers in serious distress, it offers no relief to what are doubtless many, many "middle-class" Indians similarly pressed to the brink and straining to cope in a volatile economy.

In South Africa, a decades-long fight to implement effective discharge relief for individual debtors has culminated in a half-hearted revision of the National Credit Act (Bloomberg subscription likely required). The long-awaited revision still promises relief only to a small subset of severely distressed borrowers. The bill offers debt discharge only to "critically indebted" debtors with monthly income below US$500 and unsecured debts below US$3400. A step to be applauded, this still leaves many, many South Africans to contend with a complex web of insolvency-related laws that offers little or no relief to many if not most debtors. And still, banks engaged in the typical gnashing of teeth and shedding of crocodile tears, terribly worried that this new dispensation will "drive up the cost of loans for low-income earners, restrict lending and encourage bad behavior from borrowers." Where have we heard this before? To their credit, South African policymakers apparently "made no attempt to interact with the [lending] industry," though the compromise solution here still leaves much to be desired.

On a brighter note, the country of Georgia is on the verge of adopting major reforms to its laws on enforcement and business insolvency (story available only in the really neat Georgian language, check it out!). In an address to parliamentary committees, the Minister of Justice remarked that a new system of personal insolvency is also in development. Georgia suffers from many of the same problems of micro-finance as Cambodia, so perhaps Cambodia and other similarly situated countries will be able to learn from Georgia's example. We'll see what they come up with.

Trump, Denmark and Greenland: What Next?

(This post draws directly from ideas from co authored work with Joseph Blocher; and particularly the numerous discussions we have had about the incentives that a market for sovereign control might create for nations to take better care of their minority populations in outlying areas (e.g., the US and Puerto Rico).  Mistakes in the discussion below, however, are solely mine).

It seems like forever ago, but it has only been a few weeks since the news came out that our esteemed chief executive wanted the US to purchase Greenland.  The notion was widely ridiculed in the press and provided wonderful fodder for comics around the globe.  But as people looked beneath the surface, it quickly became apparent that there was nothing in international law that prohibited the purchase and sale of sovereign control over a territory.  Where Trump was wrong was in his assumption that he needed to purchase Greenland from the Danes.  Under post World War II international law, however, a former colony such as Greenland has the right of self determination.  To quote the Danish prime minister, responding to Trump, “Greenland is not Danish. Greenland belongs to Greenland.”

The Danish PM also said “I strongly hope that this is not meant seriously.”  And, from her perspective of apparently wanting to keep the status quo of Greenland being part of Denmark, it makes sense that that’s what she hopes.  But let us focus on the words “Greenland is not Danish. Greenland belongs to Greenland.” If one thinks about those words just a little, they mean that Trump’s purchase (and maybe he should start calling this a “merger”, since that seems more polite) is perhaps a lot easier to execute than he initially thought.

Trump and any other suitors that Greenland might have (Canada, China, Iceland, Russia, etc.) need to only focus their attention on making the Greenlanders happy; they don’t need to worry about the Danes. No need for Trump to do diplomatic trips to Copenhagen. Trips should be to Nuuk instead. After all, it is the approval of the 55,000 Greenlanders that he needs.

How many Greenlander votes, specifically? (assuming that there would need to be a referendum first). International law doesn’t clearly say; but surely more than a majority – and ideally with a voting mechanism designed in such a way that the rights of the minority that might not want to be part of the merger being appropriately protected.

The point is that if DJT and his supporters remain committed to the Greenland strategy – and it appears they do (see here) – the next step is will be to persuade the people of Greenland that this merger is in their interest. That way, the next time Trump offers a merger deal to the roughly 55,000 Greenlanders, they will react with enthusiasm rather than horror.  One would expect, therefore, to see the US taking steps to mount the charm offensive in Greenland. And, as it turns out, preliminary steps in this direction have already been announced with the US planning to open a consulate in Greenland and engage in various outreach programs as part of its broader arctic charm strategy (here).

Coyle on Studying the History of a Contract Provision

The way many of us teach interpretation in Contract Law, there is little role for history (admittedly, this is just based on casual observation). The meaning of a clause is a function of the words that make up that clause.  The parties to the transaction are assumed to have drafted it to document the key aspects of their transaction, to balance risks and rewards blah blah.  If a dispute arises, we might have an argument as to whether a strict textualist reading of the words accurately represent what the parties really meant by them or whether we need to also examine the context of the relationship. What we do not ever do, however, is to delve into the history of the clause from before these parties contemplated using it – that is, of what prior drafters of the original versions of this clause might have meant in using it.

The foregoing makes sense in a world in which the contracts for each deal are drafted from scratch. But does anyone draft contracts from scratch?  What if we live in a world where 99.9% of contracts are made up of provisions cut and paste from prior deals; provisions that are assumed to cover all the key contingencies, but not necessarily understood (or even read)? In this latter world, where there are lots of provisions that the parties to the transaction never fully focused on (let alone understood), might there be an argument – in cases where there are interpretive disputes -- for the use of a contract provision’s history? Might that history not sometimes be more relevant than the non-understandings of the parties as to what they did or did not understand they were contracting for? (Among the few pieces that wrestle with this question are these two gems: Lee Buchheit's Contract Paleontology here and Mark Weidemaier's Indiana Jones: Contract Originalist here)

I’m not sure what the answer to the foregoing question is. But it intrigues me.  And it connects to a wonderfully fresh new body of research in Contract Law where a number of scholars have been studying the production process for modern contracts.  The list of papers and scholars here is too long to do justice to and I’ll just end up making mistakes if I try to do a list.  But what unites this group of contract scholars is that for them it isn’t enough to assume that contracts show up fully formed at the time of a deal, purely the product of the brilliant minds of the deal makers who anticipate nearly every possible contingency at the start.  Instead, understanding what provisions show up in a contract, and in what formulation, requires understanding the contract production process. (Barak Richman's delightful "Contracts Meet Henry Ford" (here) is, to my mind, foundational).

It is perhaps too early to tell whether this research will catch on and revolutionize contract law. I hope it does, but I’m biased.

One of my favorite papers in this new body of contract scholarship showed up recently on ssrn. It is John Coyle’s “A History of the Choice-of-Law Clause” (here). I have rarely found a piece of legal scholarship so compelling.  The paper is not only a model of clarity in terms of the writing, but it is brave. It is completely unapologetic in not only taking on an entirely new mode of research (a painstaking documentation of the historical evolution of the most important terms in any and every contract), but in coming up with a cool and innovative research technique for unpacking that history (this project would have been impossible to do without that innovation).

St. Petersburg Int'l Legal Forum & Insolvency Forum

I've just returned from a really fantastic conference, the entire recorded proceedings of which are available online and might be of interest to Credit Slips readers. The St. Petersburg International Legal Forum takes place annually in the marvelous city of St. Petersburg, Russia, and nestled within the broader forum is a two-day International Insolvency Forum. The numerous panels for this forum were recorded, both in English with Russian simultaneous translation and in Russian with simultaneous English translation--it was a magnificently well-organized undertaking. The insolvency forum was held on Thursday and Friday (May 16 and 17) in the main auditorium, with an agenda including panels on implementation of a rescue culture in business reorganization (chaired by INSOL Europe), digital technology in insolvency proceedings, enforcement proceedings and involuntary bankruptcy petitions (which included a great introduction to Israel's new personal insolvency procedure by the Official Receiver of Israel, the always impressive David Hahn), consumer insolvency (chaired by a member of the State Duma, and including presentations by a Supreme Court justice and other impressive Russian and foreign experts--this was the panel on which I presented on the sticky issue of financing low-value personal insolvency cases), and asset tracing.

The hosts and attendees of the forum were very grateful for and receptive to the exchange of ideas and opinions from non-Russian experts, and they seem eager to recruit more of this kind of exchange in the coming years. If you're interested in participating and/or presenting in May of next year, please let me know, and I'll coordinate and pass on the info to the organizers. St. Petersburg is an absolutely gorgeous place, and it is a very European-ized Russian city (as was Peter the Great's goal in founding the new capital there in the early 1700s). It has changed dramatically since I lived and studied there in college in the early 1990s; today, it is safe, clean, and easy to navigate, there is English on all the signs, most shop and restaurant employees speak English, and the restaurant scene is accessible, varied, and delicious, to say nothing of the world-class cultural opportunities.  Consider it!

Consumer Bankruptcy Reform ... and American Xenophobia?

I hope I'm not stepping on Bob's toes in announcing the public release of the long-awaited report of the ABI Commission on Consumer Bankruptcy. The Commission, with Credit Slips' own inimitable Bob Lawless as its reporter, was formed in December 2016 to explore revisions to the US consumer bankruptcy system that would improve the operation of its existing structure; that is, evolution, not revolution. With this explicitly limited charge, one would not necessarily expect to find much high-level discussion of how the US approach squares with or fits within the many recent global developments in consumer insolvency relief, and one would expect to see a concentration on local solutions for local stumbling blocks.

That being said ... and in no way to detract from the monumental amount and truly impressive nature of the work the Commission has done here ... one might have expected to see a bit of discussion, if not even a touch of inspiration, from comparative sources. In 1970, the Bankruptcy Commission rejected any consideration of foreign developments in consumer bankruptcy, in part because there were few such developments, and in part because so little was known about the operation of non-US bankruptcy law at the time (for those younger than I, note that neither home computers nor the public Internet existed in 1970 ...). Nearly 50 years later, we now have at our fingertips a mountain of comparative data and analysis on the development, operation, and revision of consumer insolvency systems around the world, much of it reported in English specifically to make it widely available to law reformers like the ABI Commission. Again, one would not have expected this comparative material to occupy center stage in a reform of largely US problems in the uniquely US consumer bankruptcy system. But in a bit part here and there, some comparative observations might have supported the Commission's already compelling recommendations.

The Curious Persistence of Plan B (Bankruptcy Lite)

I've come across a phenomenon numerous times over the years, again recently, that reveals the purpose of and resistance to discharge as the ultimate solution/relief for bankruptcy. In a discussion of the Chinese Supreme People's Court's struggles with "the enforcement difficulty" (执行难), the writers observe that, if a judgment debtor is found by the court enforcement division to have no available assets against which to collect a judgment, the enforcement action is terminated ... but "the court will automatically check every six months whether the involved judgment debtors have new property." On the one hand, the termination of fruitless enforcement actions sounds something like bankruptcy relief. Assuming the process actually works like this, and assuming the court enforcement division is not overly aggressive in pursuing "new property," this seems to me to take some of the pressure off of the Chinese system to adopt a proper bankruptcy discharge to alleviate the suffering of insolvent judgment debtors. On the other hand, without a discharge, the "checking for new property" part ensures that debtors' incentives to be productive will remain perpetually depressed, and official resources will be perpetually wasted in interminable pursuit of phantom new assets. These debtors' productivity and entrepreneurialism is forever lost to Chinese society in an era in which global competition continues to heat up.

More Data, Please!

Effective reform requires detailed knowledge of exactly what's being reformed. This is especially true of complex systems like corporate and individual insolvency regimes, with numerous inputs and outputs and carefully counterbalanced policy objectives. Two recent papers accentuate an acute weakness in global insolvency reform development--a lack of reliable and comprehensive data on the operation of existing systems, which will of course infect future planned procedures, as well. The global insolvency team at the IMF notes this problem in the context of its current advisory operations, and Adam Feibelman anticipates this problem with respect to India's developing insolvency and bankruptcy law. Both suggest a solution in more careful attention to data production and tracking. Both papers are interesting reading for those concerned with a more responsible approach to global insolvency policy-making, where for far too long it seems the old joke about empirical analysis has rung true: anecdote is not the singular of data.

Developing Personal Insolvency Crises in China and India

What is it like to be desperately insolvent with no access to a relief system like the bankruptcy discharge? Many, many people are likely to find out in the coming months in China and India in light of recent developments in these mammoth markets. Neither country currently offers individuals effective relief from financial distress, though both have been actively but languidly considering the adoption of such relief for a long time. That relief can't come soon enough, though I'm not optimistic about its arrival anytime in the near future.

In China, the government is stepping up its efforts to all but eliminate P2P lending platforms, the only reliable source of finance for most individuals and small businesses. I'm afraid Bob Lawless's "paradox of consumer credit" will apply here: a rapid constriction in the supply of consumer/small business credit will lead to a spike in financial distress that can't be avoided by refinancing ... leading to even greater need for an individual bankruptcy remedy that China still lacks. To be sure, many of these P2P lending networks have been ponzi schemes, victimizing innocent investor-lenders and needing to be shut down, but I fear an over-correction here. Resolving 1.22 trillion RMB ($176 billion) in loans extended by 50 million investor-lenders to goodness knows how many small borrowers will be no small feat, especially with no formal insolvency framework to organize the effort. 

Meanwhile in India, the hot mess of corporate debt has begun to cool off, leaving debt buyers hungry for even riskier loans to purchase and pursue. So they're refocusing on defaulted consumer debt. The short-term target is debt secured by homes and cars, likely to produce greater returns from the collateral, but what of the inevitable deficiencies? Unsecured personal liability for deficiency judgments will certainly be on the to-do list of these buyers in the near term, and they are already making plans for the longer term to expand to unsecured education and credit card loans.

While India and China have both made admirable progress in reforming their business insolvency systems, the tragedy unfolding in the consumer and small business sectors cries out for serious attention. These debtors are not deadbeats whom authorities can be content to leave to their chosen fates; they are the victims of global economic volatility, the lifeblood of developing economies, and the center of harmonious societies. China and India would advance and humanize their development in a massive way by finally addressing the gaping hole in their insolvency frameworks to add proper treatment for individual debtors.

Seeking nominations for the Grant Gilmore Award

The American College of Commercial Finance Lawyers seeks nominations for scholarly articles to be considered for the Grant Gilmore Award. It is not awarded every year, but when it is, the main criteria is "superior writing in the field of commercial finance law."  I am chairing the award committee this year, so please email me or message me on Twitter before December 14 to ensure your suggestion is considered. Especially eager to get suggestions of articles written by newer members of the academy that might otherwise be missed.

World Bank Group's Proposals on Small Business Insolvency

At long last, the World Bank Group's insolvency and debt resolution team has finally released to the public its report on the treatment of the insolvency of micro-, small-, and medium-sized enterprises, Saving Entrepreneurs, Saving Enterprises : Proposals on the Treatment of MSME Insolvency. The team worked for over a year on this report, concluding with a meeting of its Insolvency & Creditor/Debtor Regimes Task Force in May in Washington, D.C., where the report and its proposals were vetted. There was a surprising degree of consensus on the proposals developed here, and the final version reflects a fairly widely shared viewpoint on three key points.

Passing of Ian Fletcher

It is with great sadness that the news reached my desk of the passing of Professor Ian Fletcher of University College London. Ian was a leading international insolvency expert, well known to all of us at Credit Slips, and we extend our condolences to his family and friends. Professor Bob Wessels has a tribute.

Combatting Fear of Abuse--A Sisyphean Task?

Over the past few weeks, at conferences with judges and policymakers in Varna (Bulgaria), Seoul, and Beijing, I've been confronted with a surprising degree of skepticism about personal insolvency systems and fear of opportunistic individuals abusing the ability to evade their debts (especially while hiding assets). I've pointed out the interesting progression identifiable in Europe in recent years of a marked relaxation of such fear of abuse, especially in places like France and most recently Slovakia, which have gone all the way to adopting a very US-like open-access system to immediate discharge. For the real skeptics--and they are numerous in Bulgaria and China, both of whom are considering adopting their first personal insolvency laws--these arguments seem to fall on more or less deaf ears. Detractors put me in a no-win situation by offering one of two rejoinders: (1) the incidence of discovered abuse is low in these systems because debtors are crafty or anti-abuse institutions are weak, or (2) anti-abuse institutions like the means test and restrictive access hurdles are successfully dissuading abusers from seeking access, so we need more--not less--of this kind of effort (which I've criticized as wasteful, unnecessary, and counterproductive). A common third response is the classic "we're different" position--that is, any comparative empirical evidence from elsewhere is irrelevant to the new, entirely unique context of [insert skeptical country's name here].

Please support empirical study of decision making in business insolvency

Leiden University in the Netherlands has established an impressive strength in insolvency law studies. For example, following his retirement, the eminent Bob Wessels left his massive collection of literature on the subject to a foundation, which permanently lent the collection to the school as the Bob Wessels Insolvency Law Collection. Credit Slips readers can support the efforts of Leiden researchers without parting with their libraries by simply responding to a 15-minute online questionnaire. Niek Strohmaier is a Ph.D. candidate at Leiden conducting a study on judgment and decision making within the areas of business rescue and insolvency law. As he puts it, "We offer a novel perspective on these fields by utilizing the interdisciplinary nature of our research team and by adopting a social sciences approach with empirical research methods." If there's one thing that Credit Slips can rally around, it's empirical research! So I'm hoping we can show Niek our community spirit by responding to his survey at this link (http://leidenuniv.eu.qualtrics.com/jfe/form/SV_51GewBINfBAyfzv). The survey has received a good response from the professional membership of INSOL Europe, but I hope we can supercharge this qualitative data collection with responses from North America and elsewhere, as well. Thanks for your help!

Orwellian Debt Collection in China

Trying to get a handle on the potential for a workable personal bankruptcy procedure in China, I've repeatedly encountered evidence that the most important element might be lacking: attitude. Successful personal insolvency systems around the world differ in design and operation, but the system architects and operators generally share a sense that default is an inevitable aspect of consumer/entrepreneurial risk, and mitigating the long-term effects of such defaults is good for debtors, creditors, and society. I don't get the sense, based on my admittedly superficial outsider perspective, that this foundation is ready in China. Indeed, quite the opposite. 

For example, for the past few years, the Supreme People's Court has run a "judgment defaulter's list" of individuals who have failed (been unable?) to satisfy judgments against them. More than 3 million names were on this list already by the end of 2015, and getting on this list means more than just public shaming; it's also a "no-fly" list, preventing defaulters from buying airplane tickets, in addition to a "no-high-speed-train" and "no-hotel-stay" list, and also a "no-sending-your-kids-to-paid-schools" list. By mid-2016, about 5 million people had been preventing from buying these services in China as a result of being on the list. This initiative is just the start of a planned "Social Credit System," which will aggregate electronic data (including not only payment history, but also buying habits, treatment of one's parents, and who one's associates are) to produce a "social credit score" for all individuals. This score will affect all manner of life events, such as access not only to loans, but also to housing access, work promotions, honors, and other social benefits. The potential problems with data integrity (including inaccurate data), among many other challenges, are discussed in this fascinating paper by Yongxi Chen and Anne Sy Cheung of the Univ. of Hong Kong. 

New Saudi Bankruptcy Law ... A Boon for SMEs?!

Saudi Arabia's King Salman has approved a new bankruptcy law. {Download Saudi BK final 2-2018} Commentators have heralded this new law as a boost to economic reforms, in particular to the SME sector, but I have some serious doubts about this. A member of the Shura Council, the King's advisory body, is quoted in one report as explaining "[t]he idea is to simplify and institutionalise the process of going out of business so new organisations can come in." That latter part--new businesses coming in--requires individual entrepreneurs, either the one whose business just failed or new ones, to embrace the major risks of starting a new venture. In either event, a crucial aspect of an effective SME insolvency law, and I would argue THE most crucial aspect, is a fresh start for the failed entrepreneur (and a promise of such a fresh start for potential entrepreneurs). This fresh start is promised and delivered most effectively by provision conferring a discharge of unpaid debt. The new Saudi law all but lacks this key provision. Article 125 on the bottom of page 50 is quite clear about this: "The debtor's liability is not discharged ... for remaining debts other than by a special or general release from the creditors." It seems highly unlikely to me that creditors will offer such releases with any frequency. Yes, the new law provides a useful framework for negotiating restructuring plans, and the Kingdom deserves praise and respect for finally adopting such a measure. But the lack of a law- imposed discharge following liquidation when creditors are not willing to agree is not a foundation for a thriving SME recovery (though I understand and respect the reason why the Saudi law lacks an imposed discharge). Most SMEs are not enterprises--they are entrepreneurs; they are people, not businesses. Leaving these people to bear the continuing burden of unpaid debt does not, in my mind, reinvigorate failed entrepreneurship or entice others to join the movement. I'm afraid the effects on the SME sector of this law will be muted at best. I hope I'm wrong. 

Comparative Insolvency Conferences of Note

I thought Credit Slips readers might be interested in using some holiday down-time to catch up on a couple of recent comparative insolvency conferences with particularly cutting-edge presentations, some of which are or will be available for viewing online (and many of the papers are available on SSRN or elsewhere).

First, on Nov. 23-24, the Notary College of Madrid offered its spectacular hall to host an international conference on consumer credit information privacy and regulation (day one) and the treatment of insolvency for SMEs and consumers (day two). The second day offered a particularly interesting presentation by one of the leaders of the EU Commission's initiative for a Directive on harmonization of European laws on preventive restructuring and second chance discharge relief (followed by a bit of constructively critical commentary by an American who fancies he knows something about European personal insolvency). Recordings of the entire conference were just posted to YouTube--most of the recordings are in Spanish, but the EU Directive and critical commentary presentations are in English after a short Spanish intro (nos. 8 and 9 of the 10 recordings). Congratulations to the architects of this fabulous event, who also made impressive presentations: Matilde Cuena Casas (Univ. Complutense de Madrid), Ignacio Tirado Martí (Univ. Autónoma de Madrid), and David Ramos Muñoz (Univ. Carlos III de Madrid).

Second, the following week offered a special, rare treat with the conference, Comparative and Cross-Border Issues in Bankruptcy and Insolvency Law, hosted by the Law Review of the Chicago-Kent College of Law. The line-up of panels on both comparative and cross-border issues was particularly impressive, and we were treated to a keynote by Jay Westbrook refining his latest thinking about cross-border coordination. The conference was live streamed, and the recordings are promised in the near future, but for now, the livestream page still has (scroll down to Day 1) the recoding of Adrian Walters's terrific paper on restrictive English interpretation of the notion of international cooperation. Again congratulations to the organizers of this fabulous event (who, again, gave very impressive presentations of their own): Adrian Walters, Chicago-Kent College of Law, and Christoph Henkel, Mississippi College School of Law.

Old-Fashioned Insolvency Policy in India

It seems to me a sign of serious regulatory dysfunction when a government expressly uses bankruptcy law as a means of collection, rather than rescue or at least collective redress, with an aim to treating economic stagnation. I've seen several stories recently like this one, touting the new Indian insolvency law and government regulators' strategy of putting pressure on banks to use involuntary insolvency (creditors' petitions) to clean up the NPL problems of a series of major industrial firms. The notion that insolvency law is about collecting NPLs seems at best anachronistic, and likely at least a sign of major dysfunction in other law or policy.

The right way for one lender (including the government tax collector) to collect one defaulted loan is to engage an ordinary collections process (judgment enforcement)--which itself might well result in the sale of the company, as envisioned in the story linked above. Creditor-initiated bankruptcy/insolvency proceedings should be the nuclear option, engaged only when creditors are worried that the debtor's assets will be dissipated by other enforcing creditors before the later-in-time ones can reach the ordinary enforcement stage. Such cases should be rare. The primary users of modern insolvency law should be debtors responding to positive incentives to seek an orderly opportunity for a global renegotiation of their debts, or an orderly way for the governors of those companies to liquidate and redeploy the assets of their companies more effectively--avoiding in the process a protracted battle about their own liabilities as personal guarantors and/or as directors liable for "insolvent trading." 

The subtext of the stories I've seen about the new Indian insolvency law seem to be (1) it does not provide an adequate incentive for debtor-companies to seek either rehabilitation or orderly liquidation when they realize they're in obvious financial distress, (2) the ordinary collections apparatus in India must be totally dysfunctional if banks have no incentive to engage it to deal with their NPLs, (3) the new insolvency law also provides an inadequate incentive for creditors to engage it to seek collective redress, since the government has to put pressure on banks to do so, and (4) all of the work on proper, modern insolvency policy in recent years by UNCITRAL, the IMF and World Bank, and many, many others has been lost on Indian regulators. Especially in developing nations like India and South Africa, the battle over the appropriate, modern role of insolvency law as debtor-initiated rescue or exit, as opposed to old-fashioned creditor-initiated collections, continues to rage.

 

Dana Gas and an Existential Crisis for Islamic Finance

The very foundations of the Islamic finance world were shaken a few weeks ago when Dana Gas declared that $700 million of its Islamic bonds (sukuk) were invalid and obtained a preliminary injunction against creditor enforcement from a court in the UAE emirate of Sharjah. Like Marblegate on steriods, Dana made this announcement as a prelude to an exchange offer, proposing that creditors accept new, compliant bonds with a return less than half that offered by the earlier issuance.

Dana shockingly claimed that evolving standards of Islamic finance had rendered its earlier bonds unlawful under current interpretation of the Islamic prohibition on interest and the techniques Dana had used to issue bonds carrying an interest-like investment return. I had expected to read that Dana had used an aggressive structure like tawarruq (sometimes called commodity murabahah) that pushed the boundaries of what the Islamic finance world generally countenanced, but no. The structure Dana had used was totally mainstream, a partnership structure called mudarabah. Dana asserted that the mudarabah structure had been superseded by other structures, such as a leasing arrangement called ijarah, though in Islamic law as in other legal families, there are often multiple permissible ways of achieving a goal, not just one. And when an issuer prepares an Islamic finance structure like this, it invariably gets a sign-off from a shariah-compliance board of respected Islamic law experts (sometimes several such boards). For Dana Gas to suggest that its earlier board was wrong to the tune of $700 million, or worse yet that Islamic law had somehow changed in a few years through an abrupt alteration of opinion by the world of respected Islamic scholars is ... troubling.

New Museum of Failure

A new Museum of Failure in Sweden stands as a tribute to the notion that failure is just an opportunity for learning, powering growth and future innovation. I thought no group could appreciate that as much as Credit Slips readers. Europe is still in the process of shaking off its ages old stigma with respect to failure, especially in the context of individual entrepreneurialism. It's amazing how difficult real reform of both business and personal insolvency law has been and continues to be there (and elsewhere outside the Anglo-American world). I've long thought that shaking off these hangups, embracing failure, and facilitating fresh innovation are among the core attitudes that have made America great. Three cheers for failure!

Proposed New EU Insolvency Directive

The European Commission has just released its proposal for another Insolvency Directive, finally tackling the very sticky issue of substantive harmonization. I had hoped the Directive would push Member States toward greater harmonization of their consumer insolvency regimes, and I even made some proposals for principles and rules for such a move, but because cross-border lending to individuals for personal consumption remains quite limited in Europe (only about 5% of total household lending), the Commission concluded that "the problem of consumers' over-indebtedness should be tackled first at national level." (p. 15)  Nonetheless, the Commission's explanatory memo heartily endorses applying the principles on discharge in this new Directive (principally, providing a full and automatic discharge after a maximum 3-year process) to all natural persons, both entrepreneurs and consumers.

As to the former, though, the proposed Directive virtually shoves European national insolvency law in the direction of US law--for better or worse. The primary thrust is to encourage a rescue climate through more robust "preventive restructuring frameworks." Read: Chapter 11. The characteristics of such frameworks include leaving the debtor in possession of its assets and affairs, staying enforcement proceedings that might interfere with restructuring negotiations, mandating disclosures for proposed restructuring plans, facilitating plan adoption by creditors in classes, including a cram-down option and an explicit absolute priority rule (pp. 30, 38, not mentioning a new value corollary ... though not using the troublesome phrase "on account of its claim" in the definition of the absolute priority rule), and protecting new (DIP) financing. The importance of institutions is highlighted, with mandates concerning the expertise and training of judges, administrators, and practitioners. A few Credit Slips contributors in particular might be interested in the Commission's comment that "It is important to gather reliable data on the performance of restructuring, insolvency and discharge procedures in order to monitor the implementation and application of this Directive." The proposal thus includes detailed rules on data to be collected using standardized templates for easy comparison of empirical results across countries.

My sense is that this proposal will face some substantial political opposition, but the Commission has an impressive track record on getting its proposals adopted by the Parliament and Council. If and when this thing is adopted, I'm sure European authorities will have no trouble finding US restructuring professionals eager to volunteer to visit Europe to provide the type of training to judges, administrators, and practitioners mandated by this Directive. Put my name on the list!

Slow start for personal bankruptcy in Russia

After focusing on the substance of personal bankruptcy laws around the world for years, I'm now convinced that I should instead have been focusing on institutions and procedure. Reports of the first year of the Russian personal bankruptcy process convince me further. In a paper anticipating the new law, I predicted potential process hangups, but I badly underestimated the degree to which procedural complications would waste time and resources and undermine the system's new effectiveness. I plan to look more closely at this in the future, but for now, one statistic reported in the press tells it all: In the first full year of the new Russian law's effectiveness, of the 33,000 individual bankruptcy petitions filed, only about 15,000 have been admitted into the procedure, and of these, only about 500 have been fully processed. Debtors' errors in filling out the new paperwork doubtless contributed to this slow start, but I suspect the courts are just not embracing the new process yet, and admitted cases are being drowned in a swamp of pointless procedural formalities. A simplified procedure for these individual cases is being discussed already, but why couldn't this lesson have been learned at the outset? There is simply no need in the personal bankruptcy context for complex procedures designed for high-asset business cases. Decades of experience elsewhere have proven this time and again. And once again we see, as Margaret Howard observed in one of my favorite articles years ago, lighthouse still no good.

New Emirates Personal Bankruptcy Law to Exclude Consumers

The government of the United Arab Emirates has announced that it is working on a personal insolvency law (to accompany an imminently forthcoming business restructuring law). That's the good news. The bad news is that the personal insolvency law is to be designed exclusively for the benefit of small business people and others (shareholders, directors, employees?) with debt distress related to business. As a news report incisively observes: "So while an owner of a small business whose company cheque bounces because of lost business will receive protection under the new law, an individual whose rent cheque bounced because of short-term cash flow problems, will not."

This is a disappointing and short-sighted approach. While small business absolutely contributes to the economy and warrants insolvency relief legislation, so do consumers with non-business debt. I am afraid this discrimination between business and non-business debt in insolvency legislation will be a trend in the developing world. This will set back efforts to revitalize non-fossil fuel sectors of the economy, and it will entrench great human suffering. Sad.

Harmonizing Consumer Insolvency Law

In contrast to the cacophony created by Brexit, EU authorities have been working for several years on a project to move toward greater harmony among the discordant insolvency laws of the Member States. Though the project is focused on business rescue and restructuring, the Commission Recommendation "on a new approach to business failure and insolvency" makes specific reference to non-business cases, as well, as "Member States are invited to explore the possibility of applying these recommendations also to consumers" (para. 15).

A fantastic conference at Brunel University London this May explored the question whether there was a need for comprehensive EU intervention in the historically national-law arena of consumer debt relief. The conference presented several instructional vignettes on the varying situations in the UK, Germany, Italy, and Greece, as well as some reflections on the very limited degree of EU involvement in ensuring "fair" consumer credit markets as a supposed bulwark against overindebtedness. The presentations at the conference vividly illustrated the weakness of this supply-side-only approach, as well as the extreme divergence among exisiting European personal insolvency relief regimes. A fascinating book published in connection with this conference's greater project nicely illustrates the messy state of overindebtedness regulation in the EU today.

All of which has me thinking about a topic that recurs in the academic debate in the US from time to time:

Nortel Survives (First?) Appeal -- Canadian Edition

Unlike the bankruptcy judges in Nortel, who synchronized their trials in a landmark case of cross-border insolvency cooperation, the appellate judges run at their own speed, so results will trickle in here and there.

The Canadians got through their appeal first, and the 3-0 ruling from the panel of the Ontario Court of Appeal was rightly withering of the losing appellants.  In response to the argument accusing the trial judge of applying -- instead of the correct law of property entitlements -- his own "commercial judicial moralism," the panel had this to say on his analysis:

"Based on those facts, he concluded that a pro rata order constituted the answer to the allocation issue. The fact that the answer is also fair should not detract from the force of his conclusion."

Who said Canadians can't be snarky, or at the very least passive-aggressive?

The next stage in Canada would be the Supreme Court, which requires leave to appeal, although its grant rate is higher than the U.S. Supreme Court's cert rate.  Stay tuned!

New Saudi Restructuring Law in 2016?

A pair of Squire Patton Boggs attorneys have reported that a new restructuring law may appear in Saudi Arabia next year. Their description of the current law is very lucid--one of the only such descriptions in English I've found in years of research--and their account of the proposed law is intriguing. The current Saudi law is totally creditor-oriented and limited to encouraging creditor-by-creditor settlement. This limited approach is likely driven by religious doctrinal reasons described in the sparse English language literature on Islamic bankruptcy (see, for example, my own piece on debt forgiveness in Islamic law, and a great piece by Abed Awad and Robert Michael on the contrast between Chapter 11 and the Saudi-Hanbali approach to Islamic bankruptcy). The new law will apparently change nothing with respect to individual insolvency, unfortunately. As for business reorganization, however, I was very surprised to see the suggestions in the report that this new law would (1) allow majority votes of creditors to impose restructuring arrangements on dissenting creditors, including secured creditors, and (2) a rehabilitation process would provide for a discharge of debt. This seems inconsistent with the fundamentals of Islamic law, which are "the ultimate sources of reference for ... the other laws of the State." It will be very interesting to see how the Saudi state religious authorities reconcile the proposed "modern" business rescue approach with the quite conservative interpretation of Islamic law that prevails in the Kingdom.

Saudi Riyal image courtesy of Shutterstock

Wholesale Reform of Indian Insolvency Law

On Wednesday of this week, the Indian Ministry of Finance released a draft of a watershed Insolvency and Bankruptcy Bill, 2015. The proposed reform covers all of Indian insolvency law, both corporate and personal. A summary of the key proposals is here. While reform efforts earlier in the year concentrated on business recovery, at least 50% of this latest bill concerns a total revamp of the personal debt relief process. These provisions are long overdue. In a fabulous case study a few years ago, Adam Feibelman described both the growth of the personal lending sector in India, as well as the serious structural deficiencies of the century-old Indian regime of personal debt relief (bankruptcy). Among the biggest problems: multi-year delays as cases wind through the civil judicial system, brought on in part by excessive judicial discretion with respect to case administration, including admission of debtor petitions, stays of enforcement, and ultimate debt discharge relief. The bill makes significant progress on several fronts, though it leaves much to be desired.

New personal insolvency laws cover (almost) all of Europe

This summer saw a flurry of legislative activity in Europe with respect to personal bankruptcy. New laws emerged in Cyprus, Romania, Hungary, and (though it is not an EU Member State) Russia. These laws differ substantially among each other and from earlier models, which will give me a lot to write about in the coming years, but it is notable that the list of non-adopters in Europe is rapidly dwindling. Only Bulgaria, Malta, and the newest EU Member State, Croatia, lack such a law, and at least in Croatia, the subject has been on the legislative docket recently. It will really be interesting to see what happens if the rest of the Balkans and Turkey are approved as the latest applicants to join the EU and fall under pressure to adopt personal insolvency regimes. Will Turkey give us the first Islamic consumer bankruptcy law? Interesting times.

Russian Bankruptcy ... and Unconstitutional Homestead Exemption?!

I've finally finished my paper on the new Russian personal bankruptcy law (comments welcome), which is slated to go into effect on October 1 of this year. One side story from that paper will give a real chuckle to lawyers from Texas, Florida, and the other states with unlimited homestead exemptions. It turns out that the Russian Constitutional Court has been battling for years with the legislature about the unlimited exemption in "residential premises"  that represent the debtor's single suitable place of permanent abode. The Court has held this unlimited exemption to be unconstitutional at least twice, in 2007 and then again in 2012, yet the legislature continues to ignore these rulings and leave the law as is.

In the context of a case involving a 900 square meter apartment, the Court in 2007 concluded that the unlimited homestead exemption "disproportionately limited the creditor's rights" and was an "unfair, inadequate, unacceptable limitation on constitutional rights" to protection from the courts (!). The Court was especially concerned that this exemption was subject to abuse by debtors who might run up debts and then invest their money in a high-value exempt home (who would do such a thing?). In the 2012 case, the Court expressed its frustration with the legislature's ignoring its multiple earlier rulings on the "arbitrary" homestead exemption. It seems to have concluded that protecting anything more than the debtor's absolute minimum subsistence living space (about 18 square meters, as I understand it) is a violation of creditors' rights.  Wow.

I seriously wonder if the Constitutional Court will strike down the new personal bankruptcy law as a violation of creditors' rights, especially because it demands (theoretically) less of debtors than most European personal insolvency regimes. Time will tell ...

Russian bank image courtesy of Marina Zezelina / Shutterstock.com

Bankruptcy in Russia, 1740-1800, and the First Non-Merchant Discharge!

I discovered something surprising in my summer research on the history of bankruptcy in Russia: It seems that the first modern, court-ordered bankruptcy discharge available to non-merchant debtors appeared not in the US or England, but Russia, in 1800. I suspect the relief offered was largely theoretical, but I found it shocking and intriguing that a discharge appeared in Imperial Russian law that early on. The law will finally come full circle in October 2015, when the new Russian law on personal insolvency becomes effective. It's been a long time coming!

As in England, bankruptcy law in Russia started from a much more hostile and punitive position toward debtors. In the Charter on Bankrupts of 15 December 1740 (law no. 8300, available online here), debtors who fell into distress through no fault of their own were to be released from debtor's prison and not fined (s. 19), while debtors whose fault contributed to their downfall (e.g., by continuing to trade while insolvent) were to be fined and executed by hanging (ss. 31-32). Luckily for debtors, this law was apparently ignored in practice and was replaced in 1753 with a new law (without a death penalty) by Peter the Great's daughter, Elizabeth. 

A more radical departure from past practice appeared in the landmark Charter on Bankrupts of 19 December 1800 (law no. 19,692, available online here). This law for the first time drew a distinction between merchant and non-merchant debtors, making bankruptcy relief available to the latter in a distinct Part Two.

Relief Delayed for Russian Consumer Debtors?

I studied Russian in college because I thought a post-Gorbachev Russia was poised to become an economic superpower. I've been bitterly disappointed to see that country's leaders taking one step forward and two back for years now. The latest disappointment concerns my new academic focus: consumer bankruptcy.

First, Russian lawmakers seem to have ignored the rest of the world as they drafted a new law on "rehabilitative procedures" for "citizen-debtors." The law reflects neither direct input from international experts nor indirect analysis of the challenges and successes that dozens of other countries have encountered over the past 30 years with consumer insolvency systems. That Russia would ignore the 120-year-old U.S. consumer bankruptcy system is understandable; that it would ignore 30 years of recent trial and error in Europe and the rest of the world is ... disappointing.

Consumer Bankruptcy with Chinese Characteristics?

Deng Xiaoping's famous description of the "new" Chinese development-oriented economy begs the question of what that system intends to do with the inevitable casualties of consumerism and economic development. What of the increasing number of people in danger of falling out (or who have already fallen out) of the new middle class? In contrast to 20 years of concentrated efforts to establish and reform a business insolvency regime, it looks at though China is still very far from introducing a relief mechanism for consumer insolvency. The simple basis for debtor-creditor law in China is Article 108 of the PRC General Principles of the Civil Law:  "Debts shall be paid" (also allowing for installment payments pursuant to "a ruling by a people's court").  I suspect the Chinese phrase long predates "pacta sunt servanda."

Consumer Bankruptcy Circles the Globe

As of 2015, for the first time, laws providing for insolvency relief to natural persons (consumers) now form an unbroken chain around the world (at least on the land masses of the Northern Hemisphere). North America has been covered for some time now, of course, and individual debt adjustment laws have been spreading across Europe for three decades. The big missing link was Russia. On 29 December 2014, the final legislative steps were taken in the adoption of a long-pending bill to incorporate procedures for natural persons into the 2002 law "On Insolvency (Bankruptcy)". The new Russian law will become effective on 1 July 2015.

I have not had time to analyze the new law in detail yet, but it appears to provide for a liberal "fresh start" liquidation very much in line with the US approach, though with a minimum debt limit qualification of 500,000 Rubles (currently only about US$7500, but surely substantially more on a PPP basis). I understand that many Russian consumers are struggling with debts of at least this size, so it will be very interesting to see how the courts deal with the burden of this new procedure and how the process plays out, especially the provisions on suspending the liquidation proceedings if the debtor and creditors hammer out an agreed composition. I anticipate that real or imagined debtor fraud and "abuse" of this new relief process will be a big issue, and agreed compositions will be as rare as coconuts in Krasnoyarsk. We'll see.

Peace Around the World image courtesy of Shutterstock

Sign of the Times: Tightening Mortgage Rules in Europe

Two stories in today's world news caught my attention because they were both related to rising consumer debt and tightening mortgage rules. 

First, Sweden is proposing a particularly aggressive approach to reducing the weight of mortgage debt on consumers' balance sheets. The new accelerated amortization rules really struck me from a comparative US perspective: Swedes borrowing more than 70% of the value of their homes would have to pay the loan down by 2% a year (that's 2% of the principal) until the LTV falls to 70%, then 1% of the principal of the loan each year until LTV reaches 50%, the desired level. Wow. In the 15 years that I've been wrestling with a variety of home mortgages, I don't think I've ever paid 2% of the principal (given the back-loaded amortization schedule of most standard US home mortgage loans). To make matters worse (better?), the Swedish central bank is also considering grabbing onto the third rail of US tax reform--reducing tax deductions for mortgage interest. These are pretty aggressive moves to cool off the mortgage market and bring down consumer leverage, and they stand in stark contrast to efforts in the US and the other country in today's news ...

A More Ancient Household Goods Rule

Courtesy of Jack Ayer, professor emeritus of law and polymathy, comes the following from the Wikipedia entry on Modigliani -- Amedeo, not Franco:

Modigliani was the fourth child, whose birth coincided with the disastrous financial collapse of his father's business interests. Amedeo's birth saved the family from ruin; according to an ancient law, creditors could not seize the bed of a pregnant woman or a mother with a newborn child. The bailiffs entered the family's home just as Eugenia went into labour; the family protected their most valuable assets by piling them on top of her.

It's on Wikipedia, so who is to dispute it?

Here Come the Tourists

This week's Dealb%k is about foreign debtors that file under the US Code, which also just happens to be the subject of a recent paper that my co-author and I have posted online.