Bankruptcy Law Harmonization in the NAFTA Countries: The Case of the United States and Mexico

Wednesday, January 1st, 2003 at 12:00 am by Emilie Beavers
Emilie Beavers, Bankruptcy Law Harmonization in the NAFTA Countries: The Case of the United States and Mexico, 2003 Colum. Bus. L. Rev. 965

This note demonstrates the need for both procedural and substantive harmonization of the insolvency laws of the NAFTA countries and specifically looks at the corporate bankruptcy laws of Mexico and the United States. The note is divided into two major sections. First, it discusses the need for procedural harmonization of the bankruptcy laws of the NAFTA countries. Second, it moves on to address the need for substantive harmonization.

This note begins with a discussion of procedural integration, including the concept of universalism. Without the procedural harmonization of insolvency laws, foreign debtors and creditors may not have access to bankruptcy courts in different countries because some countries have adopted nationalistic approaches to bankruptcy, favoring domestic over foreign creditors and debtors. Universalism is necessary because it allows courts to communicate with one another to achieve an equitable distribution of the entire estate, regardless of the location of the debtor’s or the creditor’s assets. Furthermore, the procedural harmonization of bankruptcy laws is less complicated than substantive integration, as it will not require lengthy treaties or legislative action on the part of member countries. Two international bodies, The United Nations Commission on International Trade Law (“UNCITRAL”) and the American Law Institute (“ALI”), are conducting studies and developing recommendations on the harmonization of procedural insolvency law, which are relevant to the NAFTA countries. While the United States and Mexico both utilize the universal approach to procedural bankruptcy law, the countries have not harmonized their respective bankruptcy procedures.

While procedural harmonization of insolvency laws is currently taking place within the NAFTA countries, as demonstrated by the adoption by Mexico and Canada of the UNCITRAL Model Law and the work of the ALI, substantive bankruptcy harmonization has not begun. This note looks specifically at the differences in the distribution of the estate to creditors in Mexico and the United States to demonstrate the need for some form of cooperation among the NAFTA countries to develop similar substantive bankruptcy laws.

One substantive issue that makes bankruptcy proceedings diverge substantially between the United States and Mexico is the priority of creditors. The harmonization of substantive bankruptcy laws would alleviate the doubts creditors and debtors have about whether a particular liquidation will follow U.S. or Mexican bankruptcy laws. The UNCITRAL working group has also issued a Legislative Guide that describes specifications for the harmonization of international substantive bankruptcy law. This guide specifically addresses the problem of differences in the priority of creditors in the liquidation of estates, among other issues. The NAFTA countries will benefit from utilizing the Guide to aid in harmonizing their substantive insolvency laws.

With increased trade and integration, the NAFTA countries must be prepared for both positive and negative effects. In the event of a transnational bankruptcy, Canada, Mexico and the United States must plan for the insolvency of a company doing business in all three countries. The principle behind the harmonization of international bankruptcy law is that insolvency sometimes is necessary and desirable. If procedural and substantive bankruptcy laws are clear to creditors and debtors, regardless of their countries of residence or the location of the debtor’s assets, and all parties believe they will receive equitable treatment from the liquidation or reorganization of the estate, debtors will turn to the bankruptcy courts instead of incurring more debt and further damaging the estate. The NAFTA countries should cooperate with one another to create an insolvency system that enhances stability and equity for debtors and creditors in all three jurisdictions.

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