Introducing Modified Universalism

To help readers grasp the concept of modified universalism and to complement our piece on The Immovables Rule and Modified Universalism, we offer this readable explanation of this, well, universal, concept that has an application in nearly fields of industry on a global scale.

It is beneficial to begin by clarifying a set of opposing approach regarding the consequences of insolvency processes initiated under the legislation of a specific state: The first proposition is the theoretical idea of universalism, its core principle being that a debtor's assets must be gathered and allocated globally in one judicial process. Advocates of this approach include the American legal scholar Professor Jay Westbrook, who is often credited with the invention of the term modified universalism, argue that maximizing value for creditors is unattainable without a cohesive framework for realizing the debtor's assets through a unified approach.[1]

Universalism vs territorialism

The opposed approach is known as territorialism, which limits the management of insolvency to individual territorial jurisdictions, and where such actions are confined to the assets located within that specific area jurisdiction and local creditors. For territorialists, the main issue with universalists is that the idea of universalism lacks political feasibility. The application of external law and foreign courts to domestic affairs can create confusion for local creditors and negatively impact the rights and priorities they have obtained under their own legal systems.

Over time, these conflicting theories have converged, with modified universalism rising as the dominant principle. On one side, it is essential to acknowledge that strict territorialism is isolated and outdated in a connected world. Conversely, pure universalism is simply a conceptual framework that fails to represent actual circumstances. Namely that the world economy functions within countries or nation-states , or howvere we wish to label them, with the important thing being different countries have varying degrees of homogeneity between their insolvency laws and of course to adopt a pure form of universalism would allow a foreign state’s policies to override another state’s respective policies.

Modified universalism, as defined by Lord Hoffmann: ‘The primary rule of private international law which seems to me applicable to this case is the principle of (modified) universalism ... requires that English courts should, so far as is consistent with justice and UK public policy, co-operate with the courts in the country of the principal liquidation to ensure that all of the company’s assets are distributed to its creditors under a single system of distribution.’[2]

This quote and case have proven highly important for advancing universalism as it marked a shift from rigid interpretations of domestic laws, like common law in the UK, and supported a more expansive view of cross-border cooperation, ultimately setting a standard for international comity.

Which was further developed as the foundation of modified universalism, by Lord Sumption: ‘not just comity, but an acknowledgment that in a global business environment, it benefits all nations that companies with international assets and operations can be dissolved in an orderly manner according to the law of their incorporation and in a way that is acknowledged and effective worldwide.’ [2]

That said, modified universalism does not constitute a cohesive theory with a universally accepted set of traits and so until the theoretical underpinnings of modified universalism are firmly established, it is simpler to view the principle of modified universalism not as an absolute theoretical tenet, but rather as a reluctant compromise between an idealistic quest for universality and the practical necessity of acknowledging the sovereignty and territoriality of jurisdictions.

Consequently, when a court must ascertain if the principle of modified universalism is relevant in common law, it is less about identifying the extent of an actual principle and more about clarifying the genuine substance of this practical agreement.

This prompts the consideration of a more significant question: What exactly is the genuine essence of this practical agreement? Currently two differing interpretations of the concept of modified universalism exist: The first perspective indicates that the principle is simply a wide-ranging aspirational declaration urging the courts to collaborate with the foreign insolvency liquidation court to enable a unified collective insolvency procedure whenever feasible. From this perspective, the court's authority to modify the regulations of private international law is notably restricted. Its sole purpose is to promote collaboration and nothing else, or, to put it another way, the golden thread of modified universalism is one now known as ‘thin’.

By contrast, the alternative perspective holds that the idea of modified universalism is less of a goal and more of a collection of strategies that adapts private international law regulations to establish an ideal framework for international insolvencies: known as a ‘thick’ kind of modified universalism.

In both the Vneshprombank vs Bedzhamov case that CBIA is focusing on, and in Rubin vs Eurofinance SA, widely quoted cases where the presiding judges have sided with the territorial approach, however thick or thin a modified universalist approach may be forthcoming, the judges also concurred in stating that creating broader rules for cross-border insolvency is a matter for Parliament, not the courts.

Sources

[1] Jay Lawrence Westbrook, “A Global Solution to Multinational Default” (2000) 98 Mich L Rev 2276.

[2] Kai Wai Tan, A Golden Thread on the Red Dot, Singapore Academy of Law Journal, 07 June 2023