Case Comment Volume 27:3

Reflection on Bankruptcy Jurisdiction: News from the European Common Market, the United States and Canada, A

Table of Contents

A Reflection on Bankruptcy Jurisdiction: News from the European

Common Market, the United States and Canada

Kurt H. Nadelmann*

In private international law, as in other areas of “conflict”, it is a rare
occurrence to be able to report something pleasant. However, of all matters,
bankruptcy law has been blessed with such an event. It merits reporting and
assessment in connection with problems which have arisen on the “home
front”.

1. The E.E.C. Convention

The Charter of the European Economic Community obliges the
member states to facilitate the recognition of judgments rendered by their
courts.’ The six original members decided to do this multilaterally,
producing the E.E.C. Convention on Jurisdiction and the Enforcement of
Judgments of 27 September 1968.2 The Convention provides, among other
things, that jurisdictionally improper fora may not be used against residents
of the E.E.C. Such fora may have as their bases the plaintiffs nationality
(France), the plaintiffs domicile (the Netherlands) and the presence of
property for the grant of an in personam judgment (Germany). Instead, the
general principle is that the defendant must be sued at his domicile, subject
to a few generally accepted exceptions, e.g., the place of the tort for actions
in tort where a choice is given.

Each member state may continue to use its own rules of jurisdiction
against non-residents of the E.E.C. even if the ground is “exorbitant”.
Judgments rendered on an “exorbitant” basis have been denied recognition
outside the state of rendition yet the Convention forces the other member

* Research Scholar, Emeritus, Harvard Law School. Member, National Bankruptcy

Conference.

I Treaty of Rome, 25 March 1957, 298 U.N.T.S. 11, 87, art. 220
28 I.L.M. 229 (1969). See K. Lipstein, The Law of the European Economic Community

(1974), 270-82.

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states to recognize and enforce them. Understandably, this aspect of the
Convention has not been well received by the rest of the world.3

In order to gain admittance to the E.E.C., the United Kingdom agreed in
principle to accede to conventions already in force. Accession conventions
have been concluded between the old and the three new members –
Ireland,
Denmark and the United Kingdom. 4 In the United Kingdom, Parliament
must pass an act in order to make the courts apply the provisions of a treaty.
Parliament has still to do so for the 1968 E.E.C. Convention. It must be
remembered in this context that at common law, the recognition and
enforcement of judgments rendered in a jurisdictionally improper forum
would violate the principles of natural law. 5

The E.E.C. Convention of 1968, as amended, does not cover
bankruptcy decrees: due to the particular difficulties inherent in this area of
the law it was thought best to deal with the subject in a separate convention.
In 1970, after ten years work, a group of experts composed of
representatives of the six founding members of the E.E.C. produced a Draft
Bankruptcy Convention6 for consideration by the member governments.
As feared,
the Draft followed the example of the 1968 Judgments
Convention. If the debtor’s centre of administration is located in one of the
contracting states, then the courts of that state shall have exclusive
bankruptcy jurisdiction; if the centre is outside the E.E.C., then the courts of
any contracting state in which the debtor has an establishment shall have
jurisdiction;
the absence of such an administrative centre or
establishment, the courts of any state whose law permits them to declare the
debtor bankrupt may do so.7 Such an adjudication must be given effect in
all member states. Local law may allow an adjudication on the basis of the
mere presence of property or, possibly, because of the nationality or
domicile of the creditor, or of the existence of a debt.

in

3 See Nadelmann, Clouds over International Efforts to Unify Rules of Private
International Law (1977) 41 (No. 2) Law & Contemp. Prob. 54, 58; von Mehren,
Recognition and Enforcement of Foreign Judgements [ 1980] Recueil des Cours de La
Haye, t. 2, 11, 100-1; von Mehren, Recognition and Enforcement of Sister-State
Agreements: Reflections on General Theory and Current Practice in the European
Community and the United States (1981) 81 Colum. L. Rev. 1044, 1056.

4 Convention on Accession to the Convention on Jurisdiction and the Enforcement of

Judgments in Civil and Commercial Matters, 9 October 1978, 18 I.L.M. 8 (1978).

5 At the Hague Conference on Private International Law in the session of 1966, the
United Kingdom delegation had led the fight against the use of exorbitant fora. See
Nadelmann, The Outer World and the Common Market Experts’ Draft ofa Convention on
Recognition of Judgments (1967) 5 C.M.L. Rev. 409, 419.

6 Draft of a Convention on Bankruptcy, Winding-Up, Arrangements, Compositions
and Similar Proceedings[ 1975] Comm. Mkt Rep. (CCH) 6111 [hereinafter the Draft ].
See the analysis by Lipstein, supra, note 2, 284. See also Hillman, An American Lawvyer
Looks at the Common Market Bankruptcy Convention (1974) 48 Am. Bankr. L.J. 369.

7 Draft, ibid., arts 3-5.

1982]

COMMENTAIRES

In the United Kingdom, a six member Advisory Committee chaired by
Sir Kenneth Cork and composed of accountants and lawyers from England,
Scotland and Northern Ireland was appointed to report on the Draft of
1970. The Cork Committee Report, completed in 1976 and published as a
Royal Command Paper,8 contains evaluations including comparisons of
English, Scottish and Irish bankruptcy law. It is a very valuable document.
On the important question of the propriety of the provision permitting each
state subsidiarily to use its own rules on jurisdiction and requiring member
states to recognize adjudications made on such a basis, the Committee was
divided. A majority thought they should accept it to “avoid a gap”. 9
However, in his Note of Reservations,10 one of the minority, Scottish Law
Commissioner A.E. Anton, said the provision was unfair.” He also pointed
out the risks created: a debtor of the bankrupt party may pay to the foreign
trustee in bankruptcy and then, if he has assets outside the E.E.C., he maybe
forced to pay again.

Work on the 1970 Draft was resumed after the submission of the Cork
Committee Report, with delegations from all nine member states present,
and in June 1979 a revised Draft was released. 12 The objectionable part of
the jurisdictional rule has disappeared. Bankruptcy declared on a local law
basis does not come under the Convention, and thus need not be given effect
in the other member states.13 States which are not members of the E.E.C.
have undoubtedly felt a certain relief at the result. Commissioner Anton’s
insistence on due process produced results and the furor created by the 1968
Judgments Convention likely had an important influence on the outcome.

s The E.E.C. Preliminary Draft Convention on Bankruptcy, Winding-Up,

Arrangements, Compositions, and Similar Proceedings, Cmnd 6602 (1976), 141.

9 Ibid., 27-8, paras 119-21.
10 Ibid., 105.
1 Ibid., 123-4, paras 55-60.
1 Commission of the European Communities, Approximation of Laws, III/ D/72/ 80.
13 E.E.C. Bankruptcy Convention, Draft of 1970, Article 5 –
Jurisdiction based on
national law: “Where neither the centre of administration nor any establishment is situated
in a Contracting State, the courts of any Contracting State whose law permits them to
declare the debtor bankrupt shall have jurisdiction to do so.” Draft of 1980, Article 5:
“Where neither the centre of administration nor any establishment is situated in a
Contracting State, this Convention will not affect the competence of the court of any
Contracting State to declare the debtor bankrupt if its law so permits. A bankruptcy thus
declared shall not fall within the scope of this Convention.” From the Explanatory Note:
“Article 5, whilst not denying the right of the courts of the Contracting States to exercise
other grounds of jurisdiction which might be regarded as being ‘exorbitant’, ensures that
bankruptcies arising from the exercise of such jurisdiction, will have national effect only.”

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Qualified observers consider the prospects of the Draft to be poor.’ 4
Agreement on important points has not yet been reached even among the six
its three
original members. The addition of the United Kingdom -with
legal and practical problems of
separate bankruptcy jurisdictions -raises
unusual difficulty. As Mr Anton said, different approaches are possible.
Real progress could be made immediately by local removal of provisions or
practices which help local creditors to obtain more than their equal share’ 5

II. The American and Canadian Law

It is not inappropriate to compare these events in Europe in the matter of
bankruptcy jurisdiction with the current status of the American law on the
subject. Although it is difficult to believe, the Bankruptcy Reform Act of
1978 has produced a jurisdictionally improper basis for bankruptcy
adjudications, namely, the presence of property in the United States, without
the necessary limitation of the effects of such an adjudication to local
assets. 16 Attacks on the Act are clearly invited.

Since its enactment, the Bankruptcy Act of 1898, which was superseded
by the Reform Act of 1978, allowed the assumption of bankruptcy
jurisdiction over non-resident debtors with assets in the United States to
bring them to equal distribution among all creditors.’ 7 The Act of 1876,
which had expired in 1878, did not do so. Judge John Lowell placed a
provision to that effect in the draft of new federal bankruptcy legislation he
prepared at the request of the Board of Trade of Boston. However, the
Bankruptcy Bill of 1882, which emerged out of the “Lowell Bill” of 1880, was
defeated in the House of Representatives.’ 8 Hence, some early recognition
was given to the idea that local assets should not go only to those creditors

14 It should be noted that the Draft fails to deal with the problems arising from the
location of assets outside the E.E.C. The law of the place of adjudication will govern. See
“The Common Market Bankruptcy Convention Draft: Foreign Assets and Related
Problems”, in K. Nadelmann, Conflict of Laws: International and Interstate [:] Selected
Essays (1972), 340.

15 For a discussion of the status of the law, see Nadelmann, Codffication of Conflicts
Rules of Bankruptcy (1974) 30 Ann. suisse de droit int’l 57; reprinted in Hearings on H.R.
31 and H.R. 32 before the Subcomm. on Civil and Constitutional Rights of the House
Comm. on the Judiciary, 94th Cong., 2d Sess., 1457 (1976), [hereinafter Hearings on H.R.
31 and H.R. 32].

16Act of Nov. 6, 1978, Pub. L. No. 95-598,92 Stat. 2549, 11 U.S.C. 109,541 (Supp. II
1978) which deals with “Who may be a debtor” and “Property of the Estate”, respectively.
See also Act of Nov. 6, 1978, 241(a), 28 U.S.C. 1471(e) (Supp 111978) (to take effect I
“The bankruptcy court in which a case under title II is commenced shall have
April 1984):
exclusive jurisdiction of all of the property, wherever located, of the debtor, as of the
commencement of such case.”
17 Act of July 1, 1898, ch. 541, 2(a)(1), Pub. L. No. 55-541, 30 Stat. 545, 11 U.S.C.
I 1 (a)(1) (1976). See Nadelmann, The National Bankruptcy Act and the Conflict of Laws
(1946) 59 Harv. L. Rev. 1025, 1040.

18 See C. Warren, Bankruptcy in United States History (1935), 129-30.

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COMMENTS

who win the race of diligence.19 The State of Maine added a “John Lowell
clause” to its insolvency legislation in 1891. 2o Still more important, New
York State had during the early part of the last century produced a
procedure under which local assets of non-resident debtors could be brought
to equal distribution among all creditors.21 The federal Bankruptcy Act of
1898 provided the possibility on a national basis.

It was at first unclear, however, whether the Bankruptcy Act of 1898
gave American trustees in bankruptcy the power to claim assets located
abroad. Following the example of English bankruptcy legislation, a
“property wherever located” clause was formally added to the “title to
property” section of the Act in 1952.22 No exception was stated for the case
of an adjudication against non-residents based on mere presence of property
within the United States. A specific provision stating the obvious was at that
time deemed unnecessary. The source which led to the amendment had dealt
with the subject in clear terms.23 In hindsight, reliance on what had originally
appeared to be obvious involved poor judgment. A considerable degree of
ambiguity was produced, especially for readers of the Act who are not
familiar with the field.

The preparation for the Bankruptcy Reform Act of 1978 furnished an
occasion to set things straight. However, confusion developed from the
start. The first Bill,24 introduced in 1973, based on a draft prepared by the

19 See Lowell, Conflict of Laws as Applied to Assignmentsfor Creditors (1888) I Harv. L.

Rev. 259, 262, 264.

20 Maine amended its Insolvent Law of 1878 in 1891, making it applicable to non-
residents with property in the state. See Me Rev. Stat., ch. 70, 17 (1883), am. Act of Mar.
27, 1891, ch. 109. Jurisdiction over non-resident assets is discussed in the context of New
York in Matter of Coates & Hilliard 13 Barb. 452, 458, 460 (Gen. Ct, N.Y. 1852).

insolvency proceeding. See Matter of Coates & Hilliard, ibid.

21 This was achieved by transformation of the “foreign attachment” process into an
22 Act of July 7, 1952, ch. 579, 23, Pub. L. No. 82-456, 66 Stat. 429-30, amended The
Bankruptcy Act of 1898, 70a, 11 U.S.C. I10(a) (1976). See J. MacLachlan, Law of
Bankruptcy (1956), 184; Nadelmann, Revision of Conflicts Provisions in the American
Bankruptcy Act (1952) 1 Int’l & Comp. L.Q. 484. “Property wherever located”, meaning
“property wherever located in the United States”, had appeared in the depression legislation
of the 1930s and went into the corporate reorganization chapters of the Chandler Act of
June 22, 1938, ch. 575, 1, Pub. L. No. 75-696, 52 Stat. 884, 11 U.S.C.511 (1976). See
Mussman & Riesenfeld, Jurisdiction in Bankruptcy (1948) 13 Law & Contemp. Prob. 88,
97-8.

23 Nadelmann, supra, note 17, 1041: “As a matter of legal principle, when jurisdiction is
assumed over non-residents solely on the basis of their property within the country, the
jurisdiction is limited to affecting rights in that property…. Title to other than the local
assets should, therefore, not be vested in the trustee in proceedings against non-residents.”
See also Nadelmann, Revision of Conflicts Provisions in the American Bankruptcy Act,
ibid., 486.

24 A Bill to establish a uniform law on the subject of bankruptcies H.R. 10792, 93d Cong.,

1st Sess., 4-601 (1973) [hereinafter the Commission Bill].

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Commission on the Bankruptcy Laws- of the United States created by
Congress in 1970, omitted the “property wherever located” clause added to
the Act in 1952, apparently due to an oversight. The clause reappeared in the
Bill introduced on 4 January 1977, but without excluding the cases where
mere presence of assets is the basis for the adjudication. 25 In an article 26 and
an appearance before a subcommittee of the House Judiciary Committee 27 I
urged that the limitation be added to the legislation. In the next Bill,
introduced on 23 May 1977,28 the limitation appeared but only for the case of
bankruptcy adjudication of a foreign bank having assets in the United
States. However, the limitation did not reappear in the next Bill, introduced
on 11 July 1977,29 which lead eventually to the Reform Act of 1978. The best
that can be said is that those in charge did not know what they were dealing
with.30

Where the only jurisdictional basis for an adjudication is property in the
United States, it is exorbitant and, of course, futile for an American trustee in
bankruptcy to claim assets abroad. Recent banking cases in the New York
courts demonstrated the system in operation.31 Jurisdiction is assumed to
protect the interests of all creditors. A local proceeding takes place, or,
depending upon the case, the assets may be released for disposition in the
domiciliary bankruptcy court.32

2H.R. 6, 95th Cong., 1st Sess., 541 (1977).
26 Nadelmann, Rehabilitating International Bankruptcy Law: Lessons Taught by

Herstatt and Company (1977) 52 N.Y.U. L. Rev. 1, 22.

27 Supplement, 10 January 1967, to Memorandum of 3 May 1975, Hearings on H.R. 31

and H.R. 32, supra, note 15, 1453-6.

28 H.R. 7330, 95th Cong., 1st Sess., 303 (1977): “(2) notwithstanding section 541 of
this title, in such an involuntary case [against a foreign bank] property of the estate includes
only property that is located in the United States. (3) Such an involuntary case does not bind
the debtor, and is solely an exercise of exorbitant [sic] jurisdiction against the property
specified in paragraph (2) of this subsection.”

29 H.R. 8200, 95th Cong., 1st Sess. (1977). Section 541 entitled “Property of the Estate”
remained unchanged: “The commencement of a case creates an estate. Such estate is
comprised of all the following property wherever located.”

30 Cf. Klee, Legislative History of the New Bankruptcy Code (1979) 28 De Paul L. Rev.,

reprinted in (1980) 54 Am. Bankr. L.J. 275, 293.

31 See Nadelmann, supra, note 26; Israel-British Bank (London) Ltd v. Fed. Dep. Ins.
Corp. 536 F. 2d 509 (2d Cir. 1976), rev’g401 F. Supp. 1159, cert. denied429 U.S. 978 (1976),
and the notable decisions involving Finabank of Geneva, Banque de Financement v. First
National Bank of Boston 568 F. 2d 911 (2d Cir. 1977).

32 A good illustration of the working of the American system under The Bankruptcy Act
of 1898, as am., is Israel-British Bank (London) Ltd (1978) 52 Am. Bankr. L.J. 371
(S.D.N.Y. (bankruptcy) 1978). The Israel-British Bank had not done business in the United
States but kept some funds in New York. At the petition of the London receiver,
bankruptcy proceedings were opened in New York to protect the American assets. After
removing the preferences and assuring that the rights and conveniences of local creditors
would not be prejudiced, the assets were allowed to go to London for disposition under a

19821

COMMENTAIRES

Another aspect of the American Bankruptcy Reform Act capable of
creating confusion in the international arena is its definition of “foreign
proceedings”. 33 “Foreign proceedings” are defined as those which take place
in a “foreign country in which the debtor’s domicile, residence, principal
place of business, or principal assets were located at the commencement of
such proceedings for the purpose of liquidating an estate, adjusting debts by
composition, extension, discharge or effecting a reorganization”. 34 The
appearance of “principal assets” together with the classic trio of principal
place of residence, domicile and residence is surprising. The location of
principal assets is not used as a basis for bankruptcy jurisdiction anywhere
else in the world. The definition misleads and has lead to considerable
confusion already.

In the United States, “location of principal assets” is a well-known legal
term.35 The term first appeared in the legislation of the 1930s. Location of
the principal place of business, of the principal assets, and of the place of
incorporation, was made available for venue purposes regarding legal
persons. “Location of principal assets”, used by courts in tryihg to locate the
principal place of business, was intended to counterbalance the requirement
of “place of incorporation” used by courts when looking for the location of
the principal place of business -which
proved unsuitable for American
conditions and was later dropped altogether.3 6 “Location of principal
assets” survived as a venue provision in its own right. It was used for venue in
the corporate reorganization chapter added to the Bankruptcy Act in 1938, 37
and reappeared in the Bankruptcy Rules,38 but was never incorporated into
the part of the Act covering straight bankruptcy. However, it did appear in a

court-approved creditors composition agreement. This was done in accord with The
Bankruptcy Act of 1898, 2(a)(22), I1 U.S.C. 1 I(a)(22) (1976) and Rule 119 of the Rules
of Bankruptcy Procedure, 11 U.S.C. Appendix (1976), whereby a court may suspend
bankruptcy proceedings over the American assets of a non-resident and allow those assets to
be administered according to the principal, domiciliary proceeding. Such powers also exist
under the Act of Nov. 6, 1978, 11 U.S.C. 305 (Supp. 11 1978). See Nadelmann, Israel-
British Bank (London) Ltd: Yet Another Trans-Atlantic Crossing (1978) 52 Am. Bankr.
L.J. 369.
33 The “Definitions” section first appeared in H.R. 7330, 95th Cong., 1st Sess. (1977).
34 Act of Nov. 6, 1978, 11 U.S.C. 101 (19) (Supp. H 1978) [emphasis added]. See also Act

of Nov. 6, 1978, 28 U.S.C. 1472 (Supp. 111978) (to take effect 1 April 1984).

35 For early discussions of “principal assets” see J. Gerdes, Corporate Reorganizations
(1936), 68; Weiner, Corporate Reorganization: Section 77 of the Bankruptcy Act (1934) 34
Colum. L. Rev. 1173, 1175-6; Note, Venue Under the Chandler Bill in Corporate
Bankruptcy and Reorganization Proceedings (1938) U. Chi. L. Rev. 272, 275-8.

36 Compare Act of June 7, 1934, ch. 424, 77B (a), Pub. L. No. 73-296,48 Stat. 912 with

Act of June 22, 1938, 11 U.S.C. 528 (1976).

37Act of June 22, 1938, 11 U.S.C. 528 (1976).
38 Rule 116(a)(2) of the Federal Rules of Bankruptcy Procedure, I 1 U.S.C. Appendix
(1976). The “principal assets” venue is available in the case of corporations and
partnerships but not for natural persons.

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1952 amendment 39 of the transfer section of the Act which says that, if the
interests of the parties will be best served in a particular instance, the judge
may transfer a case to a bankruptcy court in another jurisdiction –
regardless of the location of the principal assets, principal place of business,
or the residence of the bankrupt.40 It is difficult to establish to what extent
the “principal assets” venue is relied on in practice. Creditors can at best only
guess their location. The “principal place of business” is far easier to identify.
It is interesting and informative to compare the Canadian law on the
subject.41 The Bankruptcy Act, 1949 has an equivalent of the “property
wherever located” clause.42 However, the American problem concerning the
application of the clause to cases where mere presence of assets in the basis
for an adjudication does not arise. The Canadian Bankruptcy Act does not
allow the assumption of jurisdiction over non-residents on the basis of mere
presence of property.43 A serious consequence is the impossibility of
removing an attachment or garnishment which would be a preference under
the Act.44 A provision in the Canadian Bankruptcy Bill pending before
Parliament would fill the gap.45 Property would be a jurisdictional basis,46

-9 Act of July 7, 1952, 11 U.S.C. 55 (1976).
40 Act of Nov. 6, 1978, 28 U.S.C. 1475 (Supp. 111978) (to take effect I April 1984) allows
transfer to the bankruptcy court of another district in the interest of justice and for the
convenience of the parties.

41 See, in general, L. Duncan &J. Honsberger, Bankruptcy in Canada, 3d ed. (1961); J.-
G. Castel, Canadian Conflict of Laws (1975), vol. 1 and (1977), vol. 2; J.-G. Castel, Droit
internationalprivd qudbicois (1980). See also L. Houlden & C. Morawetz, Bankruptcy Law
of Canada and its supplement Bankruptcy Law of Canada [:] Current Service (1979).

42 S.C. 1949, c. 7, s. 2(k).
43 See Castel, supra, note 41, vol. 2,491-2; but see Companies- Creditors Arrangement
Act, R.S.C. 1970, c. C-25, ss. 2, 9(1); fordiscussion of the Act, see W. Fraser & J. Stewart,
Company Law of Canada, 5th ed. (1962), 468, 473.

44 In the common law provinces, Galbraith v. Grimshaw[ 1910] A.C. 508 (H.L.) would be
followed. The House of Lords denied a Scottish trustee’s claim to funds in London
garnished by a local creditor before the opening of the proceedings in Scotland.
Garnishment was void as a preference under Scottish law and could have been voided under
English law had bankruptcy been declared in England. See J. Morris, The Conflict of Laws,
2d ed. (1980), 389-90; A. Anton, Private International Law: A Treatisefrom the Standpoint
of Scots Law (1967), 442. See also Castel, supra, note 41, vol. 2, 504, citing to Galbraith:
“The movable property passes subject to any existing charges recognized by Canadian law.
However, the foreign trustee’s title prevails if the foreign adjudication in bankruptcy
preceded the attachment or garnishment of the debt in Canada.” See Nadelmann, supra,
note 26, 25-6. In Quebec, powers of a foreign trustee in bankruptcy are not recognized. See
Castel, supra, note 41, vol. 2, 505.

45 Bill C-60, An Act respecting bankruptcy and insolvency, 30th Pad., Ist Sess., 5 May
1975, 1st reading. It was withdrawn, amended and re-submitted as Bill S-9, An Act
respecting bankruptcy and insolvency, 31st ParI., 1st Sess., 8 November 1979, 1st reading.
46 See Bill C-60, s. 2 for a definition of “locality of the debtor” and s. 9 entitled

“Application of the Act”.

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COMMENTS

and the courts would be given the power to limit the proceedings to assets in
Canada. 47 The exercise of jurisdiction is made discretionary 48 as in the
American Bankruptcy Reform Act of 1978.49

For the purposes of this comment, the Canadian law with respect to
venue is particularly interesting.50 In the Bankruptcy Act presently in force,
the “locality” of a “debtor” means the principal place

2 (a) where the debtor has carried on business during the year immediately preceding
his bankruptcy,
(b) where the debtor has resided during the year immediately preceding his
bankruptcy,
(c) in cases not coming within paragraph (a) or (b) where the greater portion of the
property of such debtor is situated.51

In contrast to current American law, venue under s. 2(c) is not made
available in its own right, but subsidiarily. It will require some ingenuity to
find the “principal place” where “the greater portion of the property” is
located. The same is true for identification of “principal assets” under the
American Act. One can live with it as long as only the question of venue is at
issue and the power to transfer is limited to transfers within the same
country. The important thing is that a transfer not affect the substantive
rights of the parties.

Turning to international jurisdiction, the trap of using the presence of
property as a basis for jurisdiction on the same level as “principal place of
business” and “residence” seems to have been avoided in the Canadian law.
In American bankruptcy law, the distinctive, subsidiary character of the
basis was maintained until the Reform Act of 1978;52 indeed, it wat not lost
entirely in the early stages of the reform work. The Commission Bill of 1973
still spoke of “Applicability of the Act to Persons and Property”. 53 The
Reform Act, on the other hand, provides: “[O]nly a person that resides in the
United States, or has a domicile, a place of business, or property in the
… may be a debtor”. 54 The ambiguity makes
United States,
misunderstandings easy.

47 See Bill C-60, s. 316 (8).
48 Castel, supra, note 41, vol. 2, 493.
49 Act of Nov. 6, 1978, 11 U.S.C. 305 (Supp. 1 1978).
50 See Duncan & Honsberger, supra, note 41, 39.
51 R.S.C. 1970, c. B-3, s. 2.
52 Bankruptcy Act of1898, 2(a)(1), I I U.S.C. 11 (1976). See Nadelmann, supra, note 15,

75-6.

53 Commission Bill, supra, note 24 1-103, entitled “Applicability of Act to Persons and
Property”: “Relief may be obtained by ordirected under this Act in respect of a debtor orhis
estate if he resides or has his domicile or place of business within the United States”
[emphasis added].

5 Act of Nov. 6, 1978, 11 U.S.C. 109(a) (Supp. 111978). The Commission Report, H.R.
Doc. No. 93-1371, 93d Cong., 1st Sess. (1973) does not explain why the list was started with

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III. The Draft Convention

Notice must be taken of negotiations for a bankruptcy treaty between
Canada and the United States which have run into difficulties concerning the
jurisdictional approach to be used. A draft treaty released on 29 October
1979 has been made available on both sides of the border. 55 In his treatise on
Quebec private international law, J.-G. Castel calls the draft “original”. 56
This is certainly the case. Jurisdiction would go to the state within whose
territory the greater portion of the debtor’s property is located. Immoveable
and moveable property is “conclusively presumed” to be located where it is
physically situated. Shares, debts and other forms of incorporeal property
are “conclusively presumed” to be located at the debtor’s principal place of
business, or his residence if he is not a merchant. Rules are given for
determination of the value of property. If excessively lengthy or expensive
evaluations are foreseeable, the court sitting on the case may retain
jurisdiction.

A “location of the greater portion of the assets” test is thus promoted for
the assignment of bankruptcy jurisdiction between Canada and the United
States. Yet, the draft stops half-way. By way of unrebuttable presumption,
large parts of the assets are to be considered as located at the principal place
of business of the debtor, which is the proper place for the assumption of
bankruptcy jurisdiction. The possible extent of future legal acrobatics can
only be left to speculation. 57

Business clearly involves the taking of risks, but here the creditor is asked
to take a gamble on the law of the location of the debtor’s assets at an
uncertain future time, which may severely limit the amount he can recover.
Practically, this cannot be defended, because property is volatile. Legally, it
is completely untenable. The creditor’s claim is against the totality of the
assets. The source of the idea may well have been the erroneous treatment of
“property” as jurisdictional basis in the American Bankruptcy Reform Act.
“Principal property” is also used as a test in the draft: the Convention is
to apply only if the principal property is in one or both of the countries,

“residence” rather than “principal place of business”, and why “principal” was dropped from
“principal place of business”. Section 109, with “property” emphasized, is mentioned and
discussed in Hanisch, Aktuelle Probleme des Internationalen Insolvenzrechts (1980) 36
Ann. suisse de droit int’l 109, 119, fn. 30.
55 Becker, Transnational Insolvency Transferred (1981) 29 Am. J. Comp. L. 706, 712-3.
For a summary of the draft see Castel, Droit internationalprivd qudbdcois, supra, note 41,
443. See also Houlden & Morawetz, Current Service, supra, note 41, “New Developments”,
Rel. 5, April 1981, reprinting the summary of the draft given in Superintendent of
Bankruptcy, Information Statement No. 9, 7 September 1979.

56 Castel, ibid., 444.
57 The switching of litigation to other courts is allowed for controversies whose resolution
is capable of being adjudicated by a court other than the one in which the case is pending.

1982]

COMMENTAIRES

principal property being defined as “property fairly considered of greater
value than in any other state”. Leaving the question of practicality aside,
there is no apparent reason for this limitation in the draft.

Bankruptcy jurisdiction has traditionally gone to the court of the
debtor’s principal place of business. 58 In treaties dealing with bankruptcy
that place is also taken as the logical point of departure.59 Yet, the law of that
court cannot be made the governing law for all purposes, since the debtor
may have been active in more than one state. Conflict of laws’ principles can
suggest that foreign law be applied and hence modern treaties include choice
of law rules. The draft discussed here merely says that the rules of private
international law have to be considered, which is self-evident. More help
should be provided by a treaty.

The draftsmen may, in this case, have assumed that the law in the United
States and Canada is more or less the same. This is unrealistic. Both the
bankruptcy legislation and the substantive law on which it is based differ
greatly.60

The great division, for international bankruptcy problems, is between
cases where both assets and creditors are located abroad and cases where no
local creditors are within the foreign court’s jurisdiction. American courts
have not helped creditors located abroad against their own trustees in
bankruptcy.61 When bankruptcy is declared abroad, and assets and
creditors are located within the court’s jurisdiction, the domestic creditors
have a right to expect their legal system to protect their interests. The
relinquishment of jurisdiction should only occur with knowledge of all the
facts. An alternative is that multiple proceedings may be found to be
preferable because of the conditions of the case.

58 See Nadelmann, Bankruptcy Treaties (1944) 93 U. Pa. L. Rev. 58.
59 Ibid., 72. The same general approach is contained in the E.E.C. Draft Convention,

supra, note 6.

60 For an argument over the merits of the floating charge, an English security device used
in Canada but not in the United States, see Rubin, The U.S. Creditors’ Unfair Advantage
Over Canadian Creditors (1979) 84 Com. L.J. 470. The floating charge is described in, e.g.,
Muir Hunter, “Appointments over the Property of a Company – Termination of
Receivership” in R. Walton, Kerr on the Law and Practice as to Receivers, 15th ed. (1978),
chap. 18. See also Abel, “Has Article 9 Scuttled the Floating Charge?” in J. Ziegel & W.
Foster, Aspects of Comparative Commercial Law: Sales, Consumer Credit, and Secured
Transactions (1969), 410. For American conflicts rules see Leflar, Conflict of Laws under
the U.C.C. (1981) 35 Ark. L. Rev. 87.

61 See Nadelmann, supra, note 17, 1046. Cf. J. Story, Commentaries on the Conflict of
Laws, 2d ed. (1841), 414; and see Cornfeldv. Investors Overseas Services, Ltd471 F. Supp.
1255 (S.D.N.Y. 1979), affd 614 F. 2d 1286 (2d Cir. 1979).

Mc GILL LA W JO URNA L

[Vol. 27

Control over local assets can make all the difference, as was shown in the
New York phase of the Herstatt case,62 which ended with the agreement by all
parties involved on a scheme for the distribution of more than $160 million in
New York banks. An important issue in the failure of the Cologne bank was
the treatment of claims resulting from incomplete foreign exchange spot-
transactions, for which funds in the New York banks were to furnish the
counterpart. The release of the funds to proceedings in Cologne would have
led to the reduction of these claims to ordinary claims. The possibility of a
bankruptcy adjudication in New York, involving the application of
American (federal or state) law possibly more favourable to the issue,
produced sufficient pressure for a solution accepted as fair by the banking
world involved.

For “simple border” cases, administration in one proceeding by the court
of the debtor’s principal place of business is normally the best solution.
Where several establishments are involved, multiple proceedings are likely to
be preferable. 63 A good treaty must provide a satisfactory treatment of all
types of cases but the draft, with its single administration requirement, does
not do so.

The great advantage of the traditional, common law grant of wide
discretionary powers to judges in bankruptcy proceedings is that it can make
treatment of complex problems much less difficult.64 The American
bankruptcy legislation has recognized this principle, so that the judge has the
power to decide whether local assets should be permitted to go abroad.65
The proposed Canadian Bankruptcy Bill would have the same effect. 66 This
possible approach has not been overlooked in the work that has been done
on international bankruptcy law. The drafts produced at the Colonial
in 1887 are of special interest.67 The
Conference held

in London

62 See Becker, International Insolvency: The Case of Herstatt (1976) 62 A.B.A.J. 1290;

Nadelmann, supra, note 26.

63 See, e.g., Re E.H. Clarke & Co [1923] 1 D.L.R. 716 (Ont. S.C.); Duncan &

Honsberger, supra, note 41, 40.

64 A good example is the long-established, identical English and Scottish provisions
allowing transfer to the jurisdiction where the majority of the creditors (in number and
value) reside, if the location of the property, inter alia, suggests that the estate ought to be
distributed under the law of another jurisdiction. See An Act to Consolidate the Law
Relating to Bankruptcy, 1914,4 & 5 Geo. V, c. 59, s. 12; Bankruptcy (Scotland) Act, 1913,3
& 4 Geo. V, c. 20, s. 43; A. Anton, supra, note 44,434. For an historical persjective see W.
Bell, “On the Bankruptcy Laws of England and Scotland” in National Association for the
Promotion of Social Science, [1860] Transactions, 183, 189-90.

65 See supra, note 32, passim.
66Bill C-60, ss. 316(3), (5).
67 Proceedings of the Colonial Conference (1887), vol. 2, chap. 2, “Legal Questions”. See
Moore, Conflict of Laws within the Empire: Bankruptcy and Winding Up (1906) 7 J. Comp.
Ly (N.S.) 384, 390; Nadelmann, supra, note 58.

1982]

COMMENTS

recommendation of the British delegation at the 1925 Hague Conference on
Private International Law pointed in the same direction.68 Perhaps the most
important work in this area is the attempt at resolving problems in the field
of receiverships and decedents’ estates matters by the American Conference
of Commissioners on Uniform State Laws and the Canadian Conference of
Commissioners on Uniformity of Legislation.69

Encouraged by a remark made by a Canadian Supreme Court Justice at
the turn of the century,70 this writer suggested the need for a treaty between
Canada and the United States in 1944.71 John Honsberger has more
recently urged the better co-ordination of legislation from a Canadian
perspective.72 The Commission on American Bankruptcy Law, instituted in
1970, received recommendations from several committees of the National
Bankruptcy Conference to the effect that a treaty should be drafted
subsequent to parallel local adjustment of the respective bodies of law. 73
followed by a similar official Canadian government
This was
pronouncement. 74

68 See Nadelmann, ibid.
69 See Uniform Probate Code 8 U.L.A. 3-717 (1969). Contrary to what is the case in
Canada, decedents’ estates are not covered by the American bankruptcy legislation. See
Nadelmann, Insolvent Decedents’ Estates (1951) 49 Mich. L. Rev. 1129, 1150. Also of
interest is the Hague Conference on Private International Law, Convention Concerning the
International Administration of Estates of Deceased Persons I 1 I.L.M. 1277 (1972).

70 Mr Justice Nesbitt in Universal Congress of Lawyers and Jurists [:] Records (1905),
226.71Nadelmann, International Bankruptcy Law: Its Present Status (1944) 5 U.T.L.J. 324,
351.72 Honsberger, The Need for a Rapprochement of the Bankruptcy Systems of Canada
and the United States (1972) 18 McGill L.J. 147.
7 3 These recommendations are in the files of the Commission (now in the National

Archives, Washington D.C.).

74 Canada: Department of Corporate and Consumer Affairs, Corporate Bureau Bulletin
(November 1977), 69,70-1. John Howard, acting deputy minister of C.C.A., addressed the
51st annual meeting of the National Conference of Referees in Bankruptcy in Quebee on 9
September 1977: “Although the present bankruptcy laws of the United States and Canada
both contain provisions relating to international bankruptcies, there is no doubt that these
provisions are very much on the periphery of each statute. The growing internationalization
of business requires that these issues be moved much closer to centre stage.
“The basic policy of my Department is to set out in the proposed new bankruptcy law
flexible international bankruptcy provisions that will enable articulation of the Canadian
law with the law of any foreign state that deals with bankruptcies in a similar manner.
“But because of the different treatment in each country of the claims of secured creditors and
preferred creditors, fraudulent preferences, the status of a bankrupt, the release of debts,
and the discharge of the debtor, it is impossible ever to achieve complete harmonization,
which presupposes completely uniform policies with respect to each of these basic issues.
“There is, however, real hope for at least much better coordination of the application of the
several domestic bankruptcy laws that relate to a multinational case, particularly where the

REVUE DE DROIT DE McGILL

(Vol. 27

The difficulties with the current draft should not lead to abandonment
of the project. Comfort can be taken from the responsible attitudes of the
courts on both sides of the border. Contrary to an obiter dictum in Re C.A.
Kennedy Co. and Stibbe-Monk Ltd 75 that the attitude of some American
courts toward recognition of foreign receivers is “parochial in the extreme”,
recent American decisions giving assistance
receivers
demonstrate that the opposite is true.76 In a clash between local creditors
and the demands of a foreign trustee, the American conflicts rule does
favour the creditors; but local proceedings are available to secure equal

to Canadian

laws applicable are those of the United States and Canada. Both economies are based on
similar values and market structures. Both are creditor countries. Each is the largest trading
partner of the other. And each has demonstrated for a number of years that it is more
concerned about achieving equitable treatment for its domestic creditors than in achieving
some advantage for those creditors in any multinational insolvency proceedings.
“To date, however, we have not succeeded to coordinate our statutes. Where a bankrupt
carries on business or has property in each country, usually the only solution at present is to
conduct concurrent bankruptcy proceedings in each country, which not only entails
complicated conflict of law issues but also total duplication of administration.
“There are three basic approaches to resolve this problem. First, we can continue to
administer concurrent bankruptcies but seek to achieve as much cooperation as possible
among the trustees in each jurisdiction. This approach has worked reasonably well in the
case of the IOS financial empire, which involves several trustees and liquidators who
administer some $500 million dollars of OS Group assets in as many countries. Their
activities are coordinated by an international committee made up of representatives of the
SEC, the Luxembourg Banking Commission, the Bahamas Central Bank, the Quebec
Securities Commission, the Ontario Securities Commission, and my Department. But few
bankruptcy cases are either large enough or dramatic enough to elicit this kind of attention
and international cooperation.
“The second approach is to seek at least a bilateral bankruptcy treaty between the U.S. and
Canada. This approach was recommended as long ago as 1905 by Mr. Justice Nesbitt of the
Supreme Court of Canada in an address to the Universal Congress of Lawyers and Jurists in
St. Louis, Missouri. It was also advocated more than 30 years ago by Professor Kurt
Nadelmann, who was referring specifically to the United States and Canada. And it was
recommended more recently in the Canadian Brankruptcy Report of 1970. But the final
settlement of the terms of such a convention, because of the different policies in each
country, is necessarily a complicated, controversial and slow process.
“While I strongly support any attempt to achieve a bilateral bankruptcy treaty between the
United States and Canada, I view that as the long-term solution. In the meantime, as stated,
my Department will advocate the enactment of flexible statutory provisions that will give a
Canadian bankruptcy court broad discretion to permit coordination of insolvency
proceedings in Canada with concurrent bankruptcy proceedings in another jurisdiction,
particularly where the centre of gravity of the proceedings is in that other jurisdiction.”

75 (1976) 74 D.L.R. (3d) 87,95 (Ont. H.C.)per O’Leary J. On the conflict of laws problem
see Collins, Floating Charges, Receivers and Managers and the Conflict of Laws (1978) 27
Int’l & Comp. L.Q. 691; see also the United Kingdom report on the E.E.C. Preliminary’
Draft, supra, note 8 ss. 364-7.

76 Clarkson Co. v. Shaheen 544 F. 2d 624 (2d Cir. 1976); Cornfeld v. Investors Overseas
Services, Ltd, supra, note 61; cf. Clarkson Co. v. Rockwell International Corp. 441 F. Supp.
792 (N.D. Cal. 1977)

1982]

COMMENTAIRES

either in the local proceedings or through
distribution of local assets –
release of the funds to the foreign trustee, should the conditions of the case
allow it.77

The marshalling of assets in cases of multiple proceedings is resorted to
in both the United States and Canada, to secure equal distribution. 78 The
principle has been spelled out in Canada since the remarkable decision in Re
Breakwater Co.,7 9 which followed Banco de Portugal v. Waddell,80 the
leading English case in this area of the law. In the United States the
marshalling rule is statutory; the Bankruptcy Bill proposed in the Canadian
House of Commons would make it statutory in Canada as well.8′

The law in Canada and the United States with respect to bankruptcy
and conflict rules varies considerably and unrelated domestic attempts to
minimize differences will likely prove unhelpful. The consequences of treaty
rules must be capable of anticipation with a fairly high degree of probability;
is, consequently,
preparatory comparative
indispensable.

law work

in

this area

The bankruptcy treaty between the United States and Canada has been
promoted for solid, practical reasons. The new Canadian bankruptcy
legislation and corrections on the American side must first be awaited before
real progress can be made. At the same time, the proposed treaty should not
be abandoned due to difficulties with the draft of 29 October 1979, which is
of a preliminary nature and not sanctioned by the respective governments.

77 Act of Nov. 6, 1978, 11 U.S.C. 304 (Supp. 111978). Among the “guides” given to the
judge is “comity” in 304(c)(5), which was added by Congress at the last moment: see 124
Cong. Rec. 17, 408 (1978) (statement of Sen. De Concini) and 124 Cong. Rec. HI 1-866
(daily ed. Oct. 6, 1978) (remarks by Rep. Edwards). See Nadelmann, supra, note 26, 34-5.
78See Re Standard Insurance Co. [1968] Queens. St. R. 118 (S.C.), an important
Australian decision on marshalling. A New Zealand company was wound up in New
Zealand. It had also done extensive business in Australia. Liquidations were opened in the
states concerned and all liquidators agreed ona scheme of proceeding. Local priority claims
would be paid and the surplus sent to New Zealand for general distribution. The
Queensland and New Zealand liquidators asked the Queensland court for instructions.
Under the Queensland Company Acts, 1931 to 1960, s. 339, local claims had priority on
In proceedings in which all liquidators were
immovable property in Queensland.
represented it was held that the local claims should be given priority but that in the New
Zealand distribution the payments would be handled as preferences, the beneficiaries
having to wait until all other creditors had first received the same percentage of their claims.
The Court noted that the Queensland Company Act of 1961 no longer has the priority rule.
Cf. E. Sykes & M. Pryles, Australian Private International Law (1979), 227. See also Re
Northland Services Pty Ltd (1978) 18 Austl. L.R. 684 (S.C.N. Terr.)

79(1914) 33 O.L.R. 65 (H.C.).
80(1880) L.R. 5 App. Cas. 161 (H.L.)
81 Bill C-60, s. 317.