by Brooke Wunnicke

A letter of credit involved in a crossborder insolvency proceeding can easily become tangled in a thorny legal thicket. Some examples:

- If one or more entities in the tripartite relationships of applicant, beneficiary, issuer or confirmer of a letter of credit are multinationals, more than one "cross-border" may be involved in the proceedings;

- If the insolvent party to the letter of credit is domiciled in a country different from the other parties, the question arises as to which country has jurisdiction over the insolvency proceedings;

- If the multinational insolvent party to the letter of credit is a bank or a credit institution, is it subject to the same cross-border international arrangements as a non-financial institution? And if not, what happens?

These questions have no general answer, because no uniformity of insolvency law and procedures exists among the world's countries. Cross-border insolvency is inherently complex, technical and full of legal pitfalls.

The UN and the EU

Both the United Nations and the European Union have tried to create uniform laws and procedures. In 1997, the United Nations Commission on International Trade Law (UNCITRAL), adopted the UNCITRAL Model Law on Cross-Border Insolvency (Model CBI Law). Most major trading countries have adopted the Model Law, including Australia, Canada, Japan, South Korea, the UK and the United States. On 1 July 2009, UNCITRAL adopted the "interim final" text of the UNCITRAL Practice Guide on Cross-Border Insolvency, intended to aid judges and lawyers in their use of the Model Law.

On 31 May 2002, the EU Insolvency Regulation became effective, which applies to all EU member states (except Denmark). The Regulation does not have uniform provisions of substantive law, but is limited to procedure, with determination of jurisdiction being the Regulation's primary function. Unfortunately, the Regulation has not had the desired effect, because the judges in the courts of different countries interpret its provisions differently.


In fact, cross-border insolvency raises a host of questions: Which country has jurisdiction? Which country's law is applicable? Which entity is the insolvent debtor - the applicant, the beneficiary or the issuing bank? Is a multinational branch office or subsidiary involved?

No attempt will be made in this short article to explore the scenarios. Instead, the discussion here includes the basic principles affecting a cross-border insolvency proceeding in which the insolvent debtor is the applicant or beneficiary of the letter of credit.

If the insolvent debtor is the issuing financial institution, the applicable statutes and procedures, regardless of country, differ from those applicable to the applicant and the beneficiary. The international agreements to standardize procedures have, to date, excluded financial institutions. This exception seems reasonable, because in every country these institutions are subject to separate regulations and are handled by different government agencies.


Which country has jurisdiction, i.e., the authority of a court to hear and decide cases? Within a country, the courts' jurisdiction is authorized by constitution and statute. In a cross-border situation, no global authority dictates jurisdiction. Instead, comity and cooperation are key to its determination.

Comity is a principle of international law providing that courts of one nation should respect the authority of another nation to legislate over, command and adjudicate issues concerning its own citizens. UNCITRAL's Model CBI Law has been criticized by those who claim it rejects comity and cooperation and replaces them with a complex procedural protocol. But this criticism appears to question the concept and utility of crossborder uniformity of procedures.

Consider this example. The applicant for the letter of credit is the bankruptcy debtor and may want the court in its domicile to have jurisdiction in the hope that it will favour local creditors or for other reasons that the debtor deems favourable to itself. A foreign creditor, especially a major foreign creditor of the insolvent debtor, may resist holding the main insolvency proceeding in a country other than its own because of its unfamiliarity with the law and the additional expense involved in pursuing its claim there. Which country obtains jurisdiction will usually depend initially on the decision of the court where the main insolvency proceeding is initiated - except that if another party resists that decision, another country may also claim jurisdiction. Determination of jurisdiction, or perhaps jurisdictions, in a cross-border insolvency is one of the complicating issues.

Choice of law

What is the choice of law in a crossborder insolvency proceeding? Choice of law is obviously intertwined with the question of jurisdiction. When there are questions as to which country's law will apply, this can give rise to conflict of law battles. Both the insolvent debtor and its creditors understandably want to apply the law of an eligible country most favourable to their respective interests. Moreover, those involved in secondary proceedings related to the same insolvency, but located in jurisdictions other than that of the primary proceedings, may seek to be recognized and reconciled under the primary proceedings.

Consider a straightforward example of a bankrupt US applicant. In the US, the majority rule is that a letter of credit and its proceeds are not the property of the bankrupt applicant's bankruptcy estate. Hence, a US beneficiary confronted with the applicant's insolvency proceeding will obviously prefer that US or similar law apply in order to preserve the beneficiary's right to draw under and retain the proceeds of the letter of credit.

The rationale for this majority rule is sound and is based on the independence principle. When the paying bank receives a complying presentation, it pays the draft on the letter of credit with its own funds - not those of the applicant that is obligated to repay the paying bank under a reimbursement agreement entered into when the credit is issued.

The practical advantages of "unitary and universal" insolvency proceedings are well described in a recent ruling by the Court of Appeal in England. After considering academic studies, the court held that foreign judgments in insolvency proceedings may be enforced by English courts under its common law and that important foreign judgments are an integral part of resolving cross-border insolvencies (Rubin & Lau v. Eurofinance & Ors (2010) EWCA Civ 895; www.


For standby letters of credit, the issuing bank, applicant and beneficiary may each want to consider arranging for a standby to be confirmed. In such a case, the issuing bank has a better chance to be reimbursed for a claim on a problem payment. The applicant can reduce the concerns of a beneficiary trying to avoid the cross-border insolvency thicket, thus improving its commercial relationship. And with a confirmation by a bank in its country, the beneficiary can help avoid the problems that arise.

The year 2010 saw increased focus by courts and lawyers on the complex legal problems related to cross-border insolvency. International conferences, legal seminars and articles addressed these problems, which become even more complicated when the insolvent debtor is one of the parties involved in a letter of credit. Hopefully, 2011-2012 will see a resolution, or at least a mitigation, of the legal issues. Until then, beware of being an applicant, beneficiary, issuer or confirmer of a letter of credit caught in the thorny thicket of a cross-border insolvency. But if sadly you become entangled, promptly seek competent help to extricate you or save you from serious injury.

Brooke Wunnicke is a lawyer in Denver, Colorado, US. She is the author of numerous books and articles on letters of credit. Her e-mail is