Cross-border insolvency of multinational groups

WGV aims to agree a set of key principles and draft text for a regime to address crossborder insolvency in the context of enterprise groups (defined widely to mean any entity, regardless of its legal form, that is engaged in economic activities and may be governed by insolvency law). This has started to take a form most suited to a stand-alone supplement to the Model Law. The Group’s secretariat produced a draft legislative text, incorporating three principles agreed by WGV. The three principles are:

  • coordination and cooperation of insolvency proceedings relating to an enterprise group;
  • elements needed for the development and approval of a group insolvency solution involving multiple entities; and
  • the use of synthetic proceedings in lieu of secondary proceedings (secondary proceedings being described in the context of UNCITRAL as ‘non-main proceedings’)

As with the recast European Insolvency Regulation (EIR), the text is designed to encourage cooperation and communication between insolvency practitioners (called ‘insolvency representatives’ in the draft text) with a view to the better realisation of the group’s assets as a whole and, if particularly appropriate, via the commencement of a form of group proceedings. Although the draft text still includes a couple of unhelpful circular definitions, it is taking shape and is now close to being finalised. 

Early articles of the legislative text make it clear that it is not intended to limit the jurisdiction of the courts of adopting member states and there are several safeguards throughout the text that reflect this. The text describes its purpose as providing effective mechanisms to address cross-border insolvency and to promote the objectives of:

  • cooperation between courts (and other competent authorities);
  • cooperation between insolvency representatives
  • development and implementation of a group insolvency solution affecting some or all of the members of an enterprise group;
  • fair and efficient administration of cross-border insolvencies that protects the interests of all creditors and other interested parties – notably here, for those in the UK familiar with strong creditor rights, express reference is made to ‘including the debtors’;
  • protection and maximisation of the combined value of the assets and operations of the enterprise group members and group as a whole;
  • facilitation of the rescue of financially troubled groups thus protecting investments and preserving employment; and
  • adequate protection of the interests of creditors of each group member that participates in a group insolvency solution.

Cooperation between insolvency representatives and courts is facilitated. Participation is currently described in the draft (consistent with other UNCITRAL texts) as being ‘to the maximum extent possible’. Examples of the type of cooperation that this might take for courts include: communicating with foreign courts involved in the proceedings of other group members; coordination of the administration and supervision of the affairs of group members; and coordination of concurrent proceedings and appointing a person or body to act at the direction of the court.

The courts may coordinate between themselves with respect to the appointment and recognition of a single, or the same, insolvency representative to administer the proceedings of members of the same enterprise group in different member states. These measures are qualified by draft provisions explaining that participation by a court in communications with other courts does not imply any waiver or compromise by the court of any powers, responsibility or authority, nor any enlargement of any of the courts’ jurisdiction.

For insolvency representatives, the draft text suggests that cooperation may take the form of sharing and disclosing information (with measures to protect confidential information), coordinating the proceedings, administration and supervision of the affairs of group members, and coordination with a view to developing and implementing a group insolvency solution.

Developing a group solution

While the recast EIR anticipates separate group coordination proceedings being commenced, UNCITRAL’s draft text contemplates that when main insolvency proceedings have been commenced in respect of a member of a group in one state, any other group member may participate in that proceeding for the purpose of developing and implementing a group insolvency solution. The draft text explains that participation in this way does not subject the group member to the jurisdiction of the court. It merely entitles it to appear, be heard and make written submissions on matters affecting its interests, as well as to take part in the development of a group solution. Participation is voluntary and can take place at any time.

The definitions, as currently drafted, provide that once one group member joins another group member’s proceedings for this purpose, and the court appoints a group representative to that proceeding, it becomes a ‘planning proceeding’. The group representative is then authorised to apply to the court for various stays or protection of assets to enable a group solution to be developed, and is given the right to apply to other courts for recognition of the planning proceeding with accompanying relief.

The draft text also includes provision of a form of synthetic secondary proceedings to avoid the commencement of non-main proceedings. In anticipation of the 51st session, the draft text features provision for synthetic main proceedings – so that an insolvency representative of a group member in one member state may, with the court’s permission, commit to providing creditors of a group member in another member state with the treatment that they would have received in their home member state. The secretariat’s annotations to the draft text highlight that these supplemental provisions are likely to be the subject of significant consideration and debate.

UNCITRAL’s draft cross-border group coordination provisions are ambitious. While EU member states automatically become subject to European regulation (unless they have opted out, as Denmark has done) the adoption of UNCITRAL text is purely voluntary. Many UN member states have not yet adopted the Model Law. As they are encouraged to do so with minimal amendment to the core text, it is sensible for these ambitious provisions to be in a separate text – remaining member states should not be discouraged from introducing the original model law.

Insolvency-related judgments

WGV has also been considering a standalone instrument/model law (rather than forming part of the current UNCITRAL Model Law on Cross-Border Insolvency) to provide for the recognition and enforcement of insolvency-related judgments. The principle is clear, but as with all proposed legislation intended to be sufficiently flexible and palatable for introduction throughout UN member states, difficulties arise in determining the detail: what type of judgments should it apply to? Should the law expressly state the types of judgment to which it should not apply? On what grounds should courts be permitted to refuse to recognise foreign insolvency-related judgments? Who should be able to make the application and what procedure should be followed? All these issues are covered by the draft text, but it is clear that, particularly in relation to the definition of what is (and perhaps also, what is not) an insolvency-related judgment, WGV has further work to do before arriving on agreed scope and wording. Until the text is finalised, it would be inappropriate to comment further on its likely scope and in particular to conclude whether, if enacted in the UK, it would give rise to a different result than seen in the Supreme Court’s judgment in Rubin v. Eurofinance SA [2012] UKSC 46.

Insolvency of MSMEs

As the work of WGV on group proceedings and insolvency-related judgments nears conclusion, the Commission has given it a mandate to consider how best to tailor the mechanisms already provided in the legislative guide specifically to address the challenges faced by micro-, small- and medium-sized enterprises (MSMEs). In anticipation of WGV considering the scope of such work, its secretariat produced a working paper1 suggesting some of the particular challenges faced by MSMEs and measures taken in various jurisdictions around the world to counter them. The perceived challenges included difficulties in accessing insolvency solutions due to lack of skills to identify and react to financial distress, passive creditors who consider the amount they will be likely to receive from the parties involved not to merit engagement, greater potential for inefficient record-keeping systems, hampering provision to creditors and other stakeholders of relevant information, and insufficient assets to fund insolvency proceedings.

The secretariat suggested that WGV could use some of its time during the May meeting to consider how the proposed work on MSMEs might be developed. The UK currently provides for moratoria-led CVAs for ‘small companies’ but otherwise its legislation does not expressly provide any insolvency or restructuring solutions specifically designed for MSMEs. The difficulty will always lie in determining where the cut-off point arises. It will be particularly interesting, therefore, for UK practitioners to follow the progress of this next project for WGV. 

These discussions will continue for some time and readers will be aware that UNCITRAL’S proposals lack the force of a legislative body to impose them on member states. Adoption of the Model Law by member states has been slow, and the matters being discussed by the working party are far from reaching a conclusion. This does not mean that the Working Group shouldn’t be ambitious in its proposals, but the aim must be to produce a text that is attractive enough for member states to want to adopt but still valuable enough to provide workable solutions.