Virtual Territoriality

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Current efforts to harmonize the laws of secured credit and bankruptcy, and to centralize bankruptcy case administration are predicated on the belief that regularizing debtor’s rights and creditor’s remedies will cause global business to flourish and will benefit both developed and less-developed countries. Certain and predictable remedies for creditors will facilitate lending and development. Coordination among courts will create opportunities to protect the going concern value of troubled businesses. The benefits that accompany such legal harmonization may, however, come at a price. Centralizing control of a bankruptcy case may create opportunities for forum shopping, and local legal variation can be a product of local culture, considered policy choices or innovation. As a result, excessive harmonization can sweep away cultural differences, produce political resistance and stifle efficient experimentation and evolution of the law.

In this article Professor Janger explores whether choice-of-law rules might be used to address these concerns about harmonization and centralization of bankruptcy law. He advocates a choice-of-law principle that he calls “virtual territoriality.” Virtual territoriality envisions a global, procedurally centralized bankruptcy case that, to the extent possible, respects the entitlements created by the various jurisdictions where the debtor does business. Under this view, the procedural bankruptcy laws of the “home” country should govern the case, while the choice of substantive law should be determined by ordinary (non-bankruptcy) choice-of-law principles. This approach, he argues, can form the basis for a cross-border bankruptcy architecture that simultaneously (1) facilitates the administration of a global bankruptcy, and (2) facilitates the international acceptance of rescue based domestic insolvency regimes.