# What are the benefits and problems associated with the territorialism approach of cross border insolvency
## Introduction
In an increasingly globalised economy, businesses frequently operate across multiple jurisdictions, holding assets and owing debts in several countries. When such a company becomes insolvent, the question arises as to how the insolvency should be administered. The territorialism approach represents one of the foundational theories for managing this process. This approach is based on the principle of state sovereignty, whereby each country where the debtor has assets will open its own distinct insolvency proceedings, governed exclusively by its own domestic laws. While this method offers certain advantages in terms of legal simplicity and the protection of local interests, it is also associated with significant problems, particularly in relation to efficiency and fairness. This essay will outline the main benefits and problems of the territorialism approach to cross-border insolvency.
## Benefits of the Territorialism Approach
The primary benefit of territorialism is the protection it affords to local creditors. Under a territorialist system, the assets located within a jurisdiction are used to satisfy the claims of creditors within that same jurisdiction, according to local priority rules (Finch and Milman, 2017). This ensures that local creditors are not disadvantaged by unfamiliar foreign laws or by having to claim in a distant foreign court. This approach provides a degree of certainty and predictability for domestic creditors, who can rely on the familiar legal framework of their own country. For example, claims that are given special priority under UK law, such as certain employee entitlements, would be protected in a UK-based proceeding, whereas they might not receive the same protection in a foreign universal proceeding.
Furthermore, territorialism is straightforward for national courts to administer. Judges and insolvency practitioners can apply their own country’s insolvency laws without the complex and time-consuming task of ascertaining and applying foreign law. This adherence to domestic law respects national sovereignty and public policy, as each state retains control over the assets within its borders and can ensure that the outcomes of the insolvency align with its own social and economic priorities (Fletcher, 2017). This can prevent a foreign liquidator from taking actions within the jurisdiction that might be contrary to national interests, such as selling a key national asset to an undesirable buyer.
## Problems Associated with the Territorialism Approach
Despite these benefits, the territorialism approach is widely criticised for its significant drawbacks. The most prominent problem is its inherent inefficiency. Conducting multiple, separate insolvency proceedings in different countries leads to a duplication of administrative tasks and a substantial increase in legal and professional costs (Finch and Milman, 2017). These increased costs directly diminish the value of the insolvent estate, leaving less money available for distribution to creditors. The lack of a central coordinating authority makes it difficult, if not impossible, to implement a cohesive restructuring plan for a multinational business, often leading to a piecemeal liquidation that fails to maximise the value of the company as a going concern.
Another major problem is the unfairness that results from the “ring-fencing” of assets. Territorialism treats each pool of assets in each country as separate, meaning creditors in an asset-rich jurisdiction may receive a full or substantial repayment, while creditors with identical claims in a jurisdiction with few assets may receive little or nothing. This outcome directly contradicts the fundamental insolvency principle of *pari passu*, which holds that creditors of the same class should be treated equally. This approach also encourages opportunistic behaviour, such as “forum shopping”, where debtors or creditors might strategically move assets to a jurisdiction with more favourable insolvency laws just before proceedings commence, thereby undermining a fair and orderly process for all stakeholders.
## Conclusion
In conclusion, the territorialism approach to cross-border insolvency presents a clear trade-off. Its benefits lie in its simplicity, its respect for national sovereignty, and the protection it offers to local creditors by applying familiar domestic laws. However, these advantages are, in the modern view, largely outweighed by its considerable problems. The inefficiency and high costs of multiple parallel proceedings, coupled with the fundamental unfairness caused by ring-fencing assets and the potential for forum shopping, make it an unsuitable model for dealing with the insolvency of complex, multinational enterprises. For these reasons, the global trend has moved decisively away from pure territorialism and towards modified universalism, as embodied by instruments like the UNCITRAL Model Law, which promotes cooperation and coordination between jurisdictions to achieve a more efficient and equitable outcome for all creditors.
## References
- Finch, V. and Milman, D. (2017) Corporate Insolvency Law: Perspectives and Principles. 3rd ed. Cambridge: Cambridge University Press.
- Fletcher, I.F. (2017) The Law of Insolvency. 5th ed. London: Sweet & Maxwell.
- United Nations Commission on International Trade Law. (1997) UNCITRAL Model Law on Cross-Border Insolvency with Guide to Enactment and Interpretation. New York: United Nations.
