Insolvency law (or bankruptcy law as it is referred to in other jurisdictions) is quite clear on how to deal with a domestic entity facing financial difficulty. But what insolvency regime regulates international institutions?

Like a domestic company, an international institution may be faced with something as common as cashflow difficulties or an inability to pay all its debts as and when they fall due for payment. But do creditors of the potentially insolvent international institution have the same insolvency remedies as they would with an insolvent domestic company? Specifically, can an International Financial Institution (IFI), such as a multilateral banking institution, be liquidated/wound up under local insolvency laws?

IFIs, such as international banks, are multilateral financial institutions formed by an agreement (or treaty) entered into between sovereign states (the Member States). These treaties operate in the realm of public international law and confer independent legal personality on the institutions they establish. Having legal personality gives IFIs certain powers, such as an ability to enter into agreements with private parties and to sue and be sued in their own name. 

Since IFIs operate at a multilateral/international level, the legal personality granted to these institutions is special. It also provides them with peculiar immunities from domestic law and normal legal process in the jurisdictions of each of the Member States. It is possible, however, for the treaties which establish IFIs to provide for the IFI to waive its immunity and subject itself to a certain Member State's domestic law.

If an IFI is facing insolvency, i.e., it is unable to pay its debts as and when they fall due for payment (specifically referred to as "commercial insolvency" in a South African context), the IFI may not generally be subject to any insolvency regime, including insolvency laws and legal process of the Member States, due to its immunity. This makes it impossible to deal with the insolvent IFI as one would with an insolvent company incorporated in a respective jurisdiction.  The IFI may waive this immunity by agreement and, by doing so, the IFI can subject itself to the insolvency laws of one, or all, of its Member States. It should be noted, however, that the IFI cannot be compelled to waive its immunity.

If a private party is seeking to contract with an IFI, the private party should take careful note of the contents of the establishing treaty and whether provision is made for waiver of the IFI's immunity.  If it does, it is advisable to enter into a written agreement with the IFI, requiring that the IFI submit to the jurisdiction and insolvency laws of the identified Member State(s), if an insolvency event occurs (for example, commercial insolvency). The insolvency event itself would also need to be informed by the insolvency laws of the respective Member State(s).

Although an IFI cannot be compelled to waive its immunity generally, a private party/potential creditor may be able to agree that the IFI do so if the IFI becomes commercially insolvent.  This affords protection to the private party/creditor in the form of clear and identifiable applicable laws to the insolvent IFI, as opposed to the private party/creditor being without remedy where the IFI enjoys its immunity.

Written by Julian Jones, Partner, Caellyn Eedes, Associate & Rohan Baijnath, Candidate Attorney at Webber Wentzel