Developments in cross-border insolvency: The UNCITRAL Model Law on Cross-border Insolvency and current issues
By Jenny Clift, UNCITRAL Secretariat, Office of Legal Affairs, United Nations
Recognising that disparities between the national laws governing international trade can potentially create obstacles to cross-border flows of goods and investment, in 1966 the General Assembly established the United Nations Commission on International Trade Law to serve as the vehicle by which the United Nations could play a more active role in reducing or removing those obstacles through modernisation and harmonisation of law.
Developments with the UNCITRAL Model Law on Cross-Border Insolvency
Since the early 1990s UNCITRAL has completed a number of different legislative texts in the field of insolvency law. The first, the UNCITRAL Model Law on Cross-Border Insolvency (the MLCBI) with Guide to Enactment, focuses on providing a legal framework to assist the conduct of cross-border cases. It establishes simple, straightforward requirements that minimise formality for the recognition of foreign proceedings, reduce the scope for cross-border disputes and facilitate predictable outcomes in a timely manner.
Negotiated between 1995 and 1997 by an intergovernmental working group comprising representatives of 72 States, seven intergovernmental organisations (IGOs) and 10 non-governmental organisations (NGOs), the MLCBI was finalised and adopted by UNCITRAL in May 1997 and endorsed by the General Assembly in December of that year. As at the end of February 2018, legislation based on the Model Law has been enacted by 43 States (45 jurisdictions) (a list of enacting States is available at www.uncitral.org).
The Dominican Republic was the latest enacting State to be noted. We understand that several States are working on enactment of the MLCBI, including Israel, India, Brazil and Thailand.
Experience with application of the MLCBI has shown that recognition is granted in the overwhelming majority of cases and that while most applications for recognition and relief appear to proceed without issue, a small number of cases have raised questions relating to the interpretation of certain provisions. These have included, in particular, the meaning of “centre of main interests” (COMI), the scope of the public policy exception in article 6 and application of the relief provisions in articles 19, 20 and 21.
The Guide to Enactment accompanying the MLCBI Law was revised in July 2013 to provide additional information and clarify some of those issues of interpretation and application. The text was adopted by the Commission in 2013 as the Guide to Enactment and Interpretation of the UNCITRAL Model Law on Cross-Border Insolvency; the revisions in no way change the substance of the MLCBI itself.
Cross-border treatment of enterprise groups in insolvency
Since the focus of the MLCBI is the conduct of cross-border insolvency proceedings for individual debtors, it can be difficult to apply to situations involving complex relationships between multiple related debtors, such as members of an enterprise group, where the relationships between those debtors might need to be factored into decisions to be taken during the insolvency process.
To address that issue, UNCITRAL’s Working Group V (WG V) commenced work on the insolvency treatment of enterprise groups in 2010. That work resulted in an addition to the UNCITRAL Legislative Guide on Insolvency Law (part three), which includes both domestic provisions to facilitate the conduct of enterprise group insolvencies, as well as provisions on cooperation and coordination in the cross-border context. The latter extend the cooperation and coordination principles of chapter IV of the MLCBI to multiple debtors connected by membership of an enterprise group.
Part three thus represents a forward step in addressing enterprise group insolvencies. While the domestic law of many States has yet to embrace the solutions proposed in the recommendations of part three, there is nevertheless support for developing a legislative regime on group insolvencies that extends those recommendations, particularly as they relate to the cross-border context. The goal is to address enterprise group insolvency in a manner that would allow a certain degree of centralisation of insolvency proceedings to support the negotiation of an insolvency solution for the group as a whole or for different parts and to reduce the number of parallel insolvency proceedings required to address financial difficulty in the group.
In the current work, the idea of centralisation focuses on commencement of insolvency proceedings in the jurisdiction that is the COMI of at least one group member, where that group member is a necessary and integral part of the insolvency solution to be developed for all or part of the group. The commencement of multiple parallel insolvency proceedings for the same or different group members might be reduced by using mechanisms that would permit, for example, the treatment of foreign creditor claims in the commencing jurisdiction in accordance with the law applicable to those claims (often referred to as “synthetic” measures), whilst at the same time protecting the interests and expectations of creditors.
Voluntary participation of other group members, including solvent group members, in the development of the group insolvency solution should be permitted when it would be of assistance in achieving an effective outcome.
The text being developed by WG V contains five chapters. Chapters 1-4 form a set of basic or core provisions, amenable to broad agreement, while chapter 5 addresses more contentious issues and includes options for those States wishing to enact provisions that go beyond the scope of the other provisions.
The text is based upon several widely-agreed foundational principles: preservation of the jurisdiction of the State in which each group member has its COMI; preservation of the ability to commence insolvency proceedings in respect of a group member as and when such proceedings might be required; designation of a proceeding commenced in a jurisdiction that is the COMI of one group member as the planning proceeding for the purpose of developing a group insolvency solution and enabling other group members with their COMI in different jurisdictions to voluntarily participate in the development of the solution; recognition of the planning proceeding in other jurisdictions as required; provision of appropriate relief in a recognising jurisdiction to assist development of the group solution; and approval of the group solution on a local basis, so that creditors and stakeholders of each affected group member vote on approval in accordance with the applicable domestic law.
Chapter 1 contains a number of general provisions, including definitions, a public policy exception (along the lines of article 6 of the MLCBI) and clarification as to the scope and intent of the provisions. New terms introduced include: “group representative”, being a person or body including one appointed on an interim basis authorised to act as a representative of a planning proceeding and “planning proceeding”, being an insolvency proceeding commenced in respect of an enterprise group member at its centre of main interests, provided: (i) one or more other group members are participating in that proceeding for the purposes of developing and implementing a group insolvency solution; (ii) the enterprise group member subject to the proceeding is a necessary and integral part of the group insolvency solution; and (iii) a group representative has been appointed.
“Group insolvency solution” means a set of proposals developed in a planning proceeding for the reorganisation, sale or liquidation of some or all of the operations and assets of one or more enterprise group members, with the goal of preserving or enhancing the overall combined value of the group members involved. The final form of the text has not yet been decided, but if it is to be a standalone text, rather than an addition to the MLCBI, additional definitions from the MLCBI may need to be added.
Chapter 2 contains coordination and cooperation provisions based upon chapter IV of the MLCBI and part three of the Legislative Guide. An additional provision addresses participation by an enterprise group member in an insolvency proceeding commenced under the law of the enacting State. Such a proceeding could be a planning proceeding, but that is not a requirement to facilitate cooperation and coordination. Participation is envisaged as meaning that an enterprise group member has the right to appear, make written submissions and be heard in the proceeding on matters affecting its interests and to take part in the development and implementation of a group insolvency solution. The provisions stress that participation is voluntary and may commence or end at any stage of the proceeding.
Chapter 3 deals with conduct of a planning proceeding in the enacting State and covers appointment of a group representative and specification of its powers, as well as relief that should be available to support the conduct of a planning proceeding in the enacting State. While many States may already provide some or all of the relief detailed, the intention of the provision is to specify the minimum relief that should be available in the group context.
Chapter 4 provides a cross-border recognition regime, based upon the analogous provisions of the MLCBI (chapter III). The provisions address the application procedure, the provisional relief that should be available between the time of application for and granting of recognition, as well as relief that should be available on recognition at the discretion of the court, as well as protection of creditors and other interested persons. An additional provision deals with approval of a group insolvency solution. Although negotiated in a centralised procedure, the text envisages the relevant elements of the solution being approved locally in accordance with the applicable law.
Chapter 5 contains provisions on the treatment of foreign claims. The first group of these form part of the core provisions and permit the use of “synthetic” measures, on the basis of an undertaking given by an insolvency representative, in lieu of commencing non-main proceedings. The second group addresses the use of those measures in lieu of commencing main proceedings, as well as approval of a group insolvency solution on a more streamlined basis, at the discretion of the court where it is satisfied that the interests of creditors of affected group members are or will be adequately protected by that group solution. The second group of provisions are identified as being optional or supplemental provisions, rather than core provisions.
The draft text will be further considered at the forthcoming session of WG V in New York from May 7-11, 2018. It is anticipated that sufficient progress will be made with resolving outstanding drafting issues for the text to be circulated for comment to States and relevant international organisations in the second half of 2018 and then for the text to be finalised and adopted by the Commission in 2019. A guide to enactment is being prepared to accompany the text.
Participation in the development of a group insolvency solution may have implications for the obligations of directors of affected group members, particularly if that member is approaching insolvency. Once the provisions on enterprise groups are finalised, the work that has been undertaken on the obligations of directors of enterprise group companies in the period approaching insolvency (building upon part four of the Legislative Guide) will be adjusted and an addition to part four finalised and adopted at the same time as the legislative provisions on enterprise groups.
Recognition and enforcement of insolvency-related judgments
The work on this topic was taken up in order to address both the lack of an international instrument covering the recognition and enforcement of these judgments, as well as some uncertainty as whether articles 7 and 21 of the MLCBI explicitly provided the necessary authority for such recognition and enforcement.
A key issue in defining the judgments to be covered by the new text is ensuring consistency with relevant regional and international instruments, as well as with work being undertaken by the Hague Conference on Private International Law to prepare a future instrument on recognition and enforcement of judgments more generally.
UNCITRAL’s WG V has prepared a draft model law with a guide to enactment on this topic.1 The text of the draft model law has been circulated to States and relevant IGOs and NGOs for comment, with a view to both the text and the guide to enactment being finalised and adopted by the Commission in July 2018.
An insolvency-related judgment is defined as one that arises as a consequence of or is materially associated with an insolvency proceeding (whether or not that proceeding has closed) and was issued on or after the commencement of the insolvency proceeding. It does not include a judgment commencing an insolvency proceeding, but the guide to enactment makes it clear that some of the orders made at the time of commencement, those that are referred to in some jurisdictions as first day orders, would fall within the definition.
The provisions address the procedure for applying for recognition and enforcement, including the availability of provisional relief, grounds for refusal, effect and enforceability of an insolvency-related judgment, effect of review in the originating State on recognition and enforcement, equivalent effect and severability. Article 3 deals with the relationship of the model law to treaties that might address the same subject matter, stipulating that where there is a treaty in force for the enacting State that concerns the recognition and enforcement of civil and commercial judgments and that treaty applies to an insolvency-related judgment, the treaty will prevail. It might be noted that the draft convention currently being developed by the Hague Conference on Private International Law excludes judgments relating to “insolvency, composition, resolution of financial institutions and analogous matters”.2
Another issue addressed by the draft text concerns its relationship to the MLCBI and, in particular, its possible limitation to recognition and enforcement of judgments issued in main and non-main proceedings. Although potentially most relevant for States having enacted the MLCBI, the draft guide indicates that other States may also choose to enact that limitation. Where the MLCBI or the limitation have been enacted, the draft model law includes an exception. This would allow a judgment relating to the recovery of assets of the debtor to be enforced, notwithstanding the existence of those assets in a jurisdiction whose insolvency proceeding would not be capable of recognition under the Model Law (i.e. it is neither a main nor a non-main jurisdiction), provided certain conditions are met.
The views expressed in this article are those of the author and do not necessarily reflect those of the United Nations.
1 The draft text is an annex to the report of the 52nd session of the Working Group (document A/CN.9/931), which is available on the UNCITRAL website at: http://www.uncitral.org/uncitral/commission/sessions/51st.html. The guide to enactment will be available in April 2018 as document A/CN.9/WG.V/WP.157 at http://www.uncitral.org/uncitral/en/commission/working_groups/5Insolvency.html.
2 See article 2(1)(e) of the November 2017 draft available at https://www.hcch.net/en/projects/legislative-projects/judgments/special-commission1 and Prel. Doc No. 1A of March 2018, the draft explanatory report of the draft text, available at https://www.hcch.net/en/governance/council-on-generalaffairs.
Jenny Clift, Principal Legal Officer and Secretary, Working Group V (Insolvency Law)
International Trade Law Division
Office of Legal Affairs