INTRODUCTION

Bankruptcy of a project participant with assets in the United States and another country or bankruptcy of a project participant with assets only in a host country presents a complicated risk for creditors. The risk includes the availability of ancillary proceedings in other countries and whether other countries recognize another country's bankruptcy proceeding. Unfortunately, there is no universal bankruptcy code.

For international projects, bankruptcy reorganization in the sense common in the United States is not generally available. This is because one jurisdiction cannot typically assert overall control of the project's reorganization.

TYPES

Two general theories of bankruptcy protection when a debtor's creditors, assets, or both are located in another country are universal and territorial. An understanding of these theories assists in an understanding of the risks in transnational project finance.

Universal

Countries that base their bankruptcy laws on a universal approach embrace the theory that the law of the country in which the bankruptcy is pending should be paramount. All of the debtor's creditors would therefore be required to participate in one proceeding. That proceeding's determinations are considered to have international effect.

Territorial

At the other extreme, countries that embrace the territorial theory consider bankruptcy law to apply only within the borders of a country. Therefore, a debtor with multinational operations would pursue bankruptcy proceedings in several countries. The bankruptcy decisions rendered in other countries concerning the same debtor would not be applied.