Using synthetic proceedings in cross-border insolvency: Opportunities and challenges

What you need to know

• The opening of “synthetic proceedings” is a unique cross-border insolvency tool that allows the application of foreign law in (usually) main or primary insolvency proceedings to mirror the effect of opening additional, usually secondary insolvency proceedings in a foreign jurisdiction.
• The “classic” use case of synthetic proceedings is the application of foreign law to determine distributions to creditors in domestic proceedings with a view to avoiding the opening of secondary proceedings in a foreign jurisdiction.
• However, synthetic proceedings may potentially be used to resolve any "choice of law" issue in insolvency proceedings that affects distributional outcomes and may result in the opening of ancillary proceedings.
• The use of synthetic proceedings is not without challenges, but they can be valuable tools to streamline cross-border insolvency resolution.
• Our detailed findings have been published in INSOL International's Technical Paper No.74.

Cross-border insolvency cases often require opening of insolvency proceedings in and coordination amongst multiple jurisdictions, leading to increased complexity, costs, and delays. Synthetic proceedings have emerged as a tool to address some of these challenges by allowing a domestic court to apply foreign law within its own insolvency process, thereby reducing the need for multiple ancillary proceedings in other jurisdictions. 

Ashurst's Rob Child and Shreya Prakash have authored an INSOL International Technical Paper that explores the origins, benefits, applications, challenges, and recommended reforms related to synthetic proceedings. This article summarises their findings.

Understanding Synthetic Proceedings

Synthetic proceedings enable a domestic insolvency court to apply foreign law—most commonly, the distributional priorities of another jurisdiction—within the insolvency proceeding it is supervising. This approach is designed to replicate the effect of opening secondary proceedings in other countries, but without the associated costs and procedural burdens. 

The classic use of synthetic proceedings has been seen in high-profile English cases such as Re Collins & Aikman, Re MG Rover, and Re Nortel Networks. In these cases, English courts permitted administrators to make distributions to certain creditors in accordance with foreign law, provided that the approach was supported by the majority of creditors. This avoided the need to open costly and time-consuming secondary proceedings in other countries.

• Cost and Time Efficiency: By centralizing the insolvency process and avoiding the need for parallel proceedings, synthetic proceedings can significantly reduce legal, administrative, and court costs, as well as shorten the overall timeline for resolution.
• Value Maximization: Centralized control over the insolvency estate can lead to better outcomes for creditors, as demonstrated in Re Collins, where synthetic proceedings enabled an additional US $45 million in recoveries. 
• Enhanced Rescue Prospects: Synthetic proceedings facilitate a coordinated approach to restructuring, minimizing the risk of inconsistent strategies and preserving enterprise value.

Adoption Trends and International Developments

Inspired by English practice and given the abovementioned benefits, the use of "synthetic" proceedings has been promoted as a more efficient and value-maximising alternative to the opening of ancillary proceedings. Two key initiatives to adopt synthetic proceedings have been implemented by the European Union and United Nations Commission on International Trade Law (UNCITRAL):

• European Union: Article 36 of the EU Insolvency Regulation (2015/848) formalizes the use of synthetic proceedings by allowing insolvency practitioners to offer undertakings to local creditors, ensuring their rights under local law are respected.  While uptake has been limited, the AMTEK Küpper Group case demonstrates successful application of synthetic proceedings under this framework .
• UNCITRAL: The Model Law on Enterprise Group Insolvency (MLEGI) incorporates synthetic proceedings, allowing for undertakings that can apply to multiple group entities. Although not yet widely adopted, jurisdictions such as the UK and Singapore are considering implementation. 

Expanding the Use of Synthetic Proceedings

While traditionally used to address creditor priority issues, synthetic proceedings have potential for broader application. At their core, synthetic proceedings enable a domestic court to apply foreign law within a single insolvency process, thereby avoiding the need to open multiple ancillary proceedings in different jurisdictions. As such, any issue in cross-border insolvency that involves a "choice of law" debate and could affect distributional outcomes may be suitable for synthetic proceedings. This includes, for example, the adoption or termination of contracts, the application of foreign law to avoidance actions, and the scope of releases in restructuring plans. 

Challenges to Wider Adoption

Despite their advantages, synthetic proceedings face several obstacles:

• Jurisdictional Limitations: Many courts lack explicit authority to apply foreign law in insolvency cases, which hinders the use of synthetic proceedings. 
• Conflicts with Domestic Law: Mandatory provisions of local insolvency law may restrict the application of or conflict with foreign law. 
• Judicial Reluctance: Courts in ancillary jurisdictions may be unwilling to cede control, especially where policy objectives of domestic and foreign insolvency legislation differ.
• Practitioner Liability: Personal liability for non-compliance with synthetic undertakings, for instance, as required under EU law, can deter insolvency practitioners. 
• Stakeholder Consensus: Synthetic proceedings typically require broad creditor support, which may not always be achievable. 

Whilst it may not be possible or desirable to entirely replace ancillary proceedings, policy-makers, judges and practitioners should consider ways to promote the use of synthetic proceedings where there is broad consensus that such use would be value-maximising, and there is no fundamental incompatibility between insolvency regimes applicable to domestic proceedings and possible ancillary proceedings.

Conclusion 

Synthetic proceedings offer a promising avenue for streamlining cross-border insolvency cases, reducing costs, and maximizing value for stakeholders. While not a panacea, and subject to legal and practical limitations, they represent a valuable tool for businesses, insolvency professionals, and policymakers seeking efficient and effective global restructurings.  Ongoing reforms and increased judicial and practitioner engagement are key to unlocking their full potential.