Washington, D.C. ? Seeking to protect the interests of American consumers and businesses following the recent economic upheavals in Asia, Sen. Chuck Grassley today announced that he will conduct a hearing to examine the need for increased international cooperation when companies declare bankruptcy or become insolvent.
This hearing of the Judiciary Subcommittee on Administrative Oversight and the Courts will begin at 2:00 p.m. in SD-226 on Thursday, December 4. Grassley is chairman of the subcommittee. Two main issues will be discussed by the two separate panels of witnesses.
First, Grassley will focus on a model law on insolvency and reorganization which the United Nations Commission on International Trade Law (UNCITRAL) unanimously adopted in May 1997, and which was endorsed by the National Bankruptcy Review Commission. In 1994, Congress created this commission to make recommendations for reform of the federal bankruptcy code. The commission presented its recommendations to Congress in October.
Currently, when a company declares bankruptcy in the United States they are granted an "automatic stay" which prevents creditors from immediately seizing that company's assets. This gives the bankruptcy court time to sort out the facts and distribute the assets in a fair and just manner. However, this policy is not the standard in other countries, where word of an impending bankruptcy may lead to a scramble by creditors to seize that company's assets. As a result, Grassley said American creditors are often left with nothing, because they were not aware of bankruptcy or because they were not legally recognized during the foreign bankruptcy proceedings. The model law, if adopted by other countries, would allow U.S. representatives to be recognized and would create an international automatic stay. State Department officials have indicated that if the model law is adopted by the United States, other countries would follow.
"The world is growing smaller as a result of international trade. When American companies conduct business overseas, they need to have some assurance that the rule of law is in place and there is predictability to the way business is conducted," said Grassley. "American businesses, especially small and medium size businesses, need to know they will be treated fairly when doing business abroad."
Second, the Grassley hearing next week will examine the impact of international insolvencies on insurance companies in the United States. Generally speaking, insurance companies in the U.S. routinely take out policies to "re-insure" themselves against possible large claims. Many of the re-insurance companies are located abroad. Frequently, the re-insurance companies doing business in the U.S. are required by state law to post a bond large enough to pay off all policy holders in order to do business in a state. The problem, according to Grassley, is that if a foreign re-insurance company declares bankruptcy they now can use Section 304 of the federal bankruptcy code to either remove their bond or to require U.S. policy holders to press their claims abroad. Grassley said he wants to see Congress prevent this from happening by clarifying that Section 304 of the bankruptcy code does not permit the removal of the bond or cause policy holders to take up their claims overseas.
"When international re-insurance companies declare bankruptcies, American insurance companies and their policyholders are sometimes stuck with the bill," said Grassley. "Iowa companies and consumers protected by state law shouldn't be harmed by loopholes in the federal bankruptcy code. I look forward to discussing this problem and finding solutions."
Grassley is the Chairman of the Finance Subcommittee for International Trade, and he serves as the Chairman of the Judiciary Subcommittee on Administrative Oversight and the Courts.
Following is a list of witnesses currently scheduled to testify.