A New Approach to Transnational Insolvencies

Part I of this article sets forth the general problems associated with transnational bankruptcies. Part II then shows that, from an efficiency standpoint, the optimal solution would be to allow firms to select, at the time of incorporation, which set of bankruptcy rules will govern in the event of financial distress. Part III examines the transnational bankruptcy problem under the assumption that each nation will continue to dictate the content of its bankruptcy laws. The accepted wisdom is that under this assumption, the best solution to transnational insolvencies is for all countries to adopt a rule whereby the home jurisdiction of the firm controls the entire bankruptcy proceeding.

Part III shows that this solution erroneously assumes that a single proceeding is optimal for all firms. Instead, it is more efficient to allow firms to select which country's or countries' laws will apply if the firm encounters financial distress. Although this proposal is not as normatively appealing as that set forth in Part II, it represents an improvement over both the current state of affairs and the most commonly suggested alternative.