How are claims prioritized in cross-border liquidations?

1 The concept of COMI

One of the key concepts in cross-border liquidations is the centre of main interests (COMI) of the debtor company. This is the location where the company conducts its main business activities, or where it is most closely connected to its creditors and employees. The COMI determines which court has the primary authority to open and supervise the liquidation proceedings, and which law applies to the claims of creditors. The COMI can be different from the legal seat or registered office of the company, depending on the facts and circumstances of each case.

2 The role of UNCITRAL

The United Nations Commission on International Trade Law (UNCITRAL) has developed a model law on cross-border insolvency, which aims to provide a framework for cooperation and coordination among courts and insolvency practitioners in different countries. The model law is not binding, but it has been adopted or influenced by many jurisdictions, such as the US, the UK, Canada, Australia, and Singapore. The model law recognizes the principle of COMI, and provides for the recognition of foreign liquidation proceedings and the protection of creditors' rights across borders.

3 The types of creditors

In general, creditors can be classified into two types: secured and unsecured. Secured creditors have a legal right to claim specific assets of the debtor company as collateral for their loans, such as property, equipment, or inventory. Unsecured creditors do not have any collateral, and they include trade creditors, employees, tax authorities, and bondholders. In a liquidation, secured creditors have priority over unsecured creditors, and they can enforce their rights against the assets in their respective jurisdictions. Unsecured creditors have to file their claims with the liquidator, and they are paid according to the order of priority established by the applicable law.

4 The order of priority

The order of priority of unsecured creditors may vary depending on the law of the COMI or the law of the local jurisdiction where the assets are located. Factors such as the status of the creditor, the nature of the claim, and the subordination of the claim can all play a role in determining priority. For instance, some creditors may have a preferential or privileged status, such as employees, tax authorities, or social security funds; in addition, claims arising from contracts, torts, or fines may have different priorities; and shareholders' claims are usually subordinated to all other claims. Moreover, some bondholders may agree to subordinate their claims to other lenders.

5 The challenges and risks

Cross-border liquidations present several challenges and risks for creditors, such as the uncertainty and complexity of the legal framework. Different countries may have different laws and procedures for liquidation, recognition, cooperation, and enforcement, which could lead to conflicts, delays, and costs for creditors. Currency and exchange rate fluctuations may also affect the value and distribution of assets among creditors, exposing them to currency risks. Additionally, the debtor company may attempt to conceal, transfer, or dissipate its assets or favor some creditors over others before or during the liquidation. This could reduce the recovery and impair the rights of creditors, requiring them to take legal action to recover their assets or challenge the transactions.