Not Just Efficiency: Insolvency Law in the EU and its Political Dimension

The main goals of bankruptcy law are to address creditors’ coordination problems and to efficiently allocate an insolvent debtor’s assets. However, despite these common goals, bankruptcy regulations diverge from State to State. The main reason for these differences is that most bankruptcy rules have also a redistributive impact upon corporate stakeholders and reflect heterogeneous policy options and voters’ preferences across countries. The economic integration of corporate activities across the borders of sovereign States raises a number of policy issues; indeed, if a corporation has assets and creditors on the territory of different States, all of them have an interest to govern its insolvency. If originally sovereign States form a federation or a single federal State or entity, bankruptcies can be either governed by each Member State or centralized at the federal level. In this regard, the U.S. and the EU follow two different paths: while in the U.S. bankruptcy law is federalized, in the EU it is governed by Member States. EU law has only unified choice-of-law and choice-of-forum criteria through a Regulation enacted in 2000, according to which, the main insolvency proceeding is governed by the jurisdiction of debtor’s “Centre of Main Interests” (“COMI”). This mechanism was meant to grant legal certainty and to avoid forum shopping, but was conceived in a 'static' world, where corporations could not transfer their headquarters into another Member State and could not reincorporate abroad. This world, however, has collapsed, due to the increasing integration of the European market and the evolution of EU law. Nowadays European corporations have often assets, activities and even their headquarters in Member States different from the State of incorporation and, additionally, can reincorporate from one State to another via cross-border mergers. The consequence is that the EU Regulation is not able to reach its original goals and needs to be amended. The first option is adopt a “choice model” and to allow corporations to choose bankruptcy law and venue they prefer; such model would consent to opt for the fastest and most efficient bankruptcy law, yet it would displace Member States’ power to protect local constituencies through bankruptcy rules and would produce spillover effects. The opposite solution is harmonization of bankruptcy law at EU level: this would internalize all externalities produced by cross-border insolvencies, yet in the EU, differently from the U.S., there is no unified courts’ system and the legislative proceeding, being still based upon mediation between States, is probably not apt to decide on redistributive bankruptcy rules. This debate shows that the choice on power allocation over bankruptcies in the EU depends on the progress of the European integration. At the present stage of this development, bankruptcy rules with redistributive impact are probably better regulated by the law of the State of the COMI or by the State most linked with the involved interests. Yet, the future evolution of the European project may hopefully induce to reconsider this result.