Written by IMF's Legal Department, this book outlines the key issues involved in designing and implementing orderly and effective insolvency procedures, which play a critical role in fostering growth and competitiveness and may also assist in the prevention and resolution of financial crises. The book draws on lessons learned from firsthand experience by some of the IMF's 182 member countries. It includes an analysis of the major policy choices that countries need to address when designing an insolvency system, a discussion of the advantages and disadvantages of these choices, and a number of specific recommendations.
Appendix: UNCITRAL Model Law on Cross-Border Insolvency
(Information note prepared by the UNCITRAL Secretariat)
I. PURPOSE OF THE MODEL LAW
1. The UNCITRAL Model Law on Cross-Border Insolvency, adopted in 1997 by the United Nations Commission on International Trade Law (UNCITRAL), is designed to assist States to equip their insolvency laws with a modern, harmonized and fair framework to address more effectively and efficiently instances of cross-border insolvency.
2. The instances of cross-border insolvency to which the Model Law applies are those where the insolvent debtor has assets in more than one State or where some of the creditors of the debtor are from a State other than the State where the insolvency proceeding is taking place.
3. The Model Law respects the differences among national procedural laws and does not attempt a substantive unification of insolvency law. It offers solutions that help in several modest, but nonetheless significant ways. With its scope limited to some procedural aspects of cross-border insolvency cases, the Model Law is intended to operate as an integral part of the existing insolvency law in the enacting State.
4. By enacting the Model Law, the State would:
provide access for the person administering a foreign insolvency proceeding (“foreign representative”) to the courts of the enacting State, thereby permitting the foreign representative to seek a temporary “breathing space,” and allowing the courts in the enacting State to determine what coordination among the jurisdictions or other relief is warranted for optimal disposition of the insolvency;
determine when a foreign insolvency proceeding should be accorded “recognition,” and what the consequences of recognition may be;
provide a transparent regime for the right of foreign creditors to commence, or participate in, an insolvency proceeding in the enacting State;
permit courts in the enacting State to cooperate more effectively with foreign courts and foreign representatives involved in an insolvency matter;
authorize courts in the enacting State and persons administering insolvency proceedings in the enacting State to seek assistance abroad;
provide for court jurisdiction and establish rules for coordination where an insolvency proceeding in the enacting State is taking place concurrently with an insolvency proceeding in a foreign State;
establish rules for coordination of relief granted in favour of two or more insolvency proceedings that take place in foreign States regarding the same debtor.
5. Together with the Model Law, the Secretariat of the Commission has published a Guide to Enactment so as to assist legislators in preparing national legislative revisions and to provide insight to other users of the text, such as judges and insolvency practitioners.
6. The increasing incidence of cross-border insolvencies reflects the continuing global expansion of trade and investment. However, national insolvency laws have by and large not kept pace with this trend, and are often ill-equipped to deal with cases that involve cross-border insolvency. This frequently results in inadequate and non-harmonious legal approaches that hamper the rescue of financially troubled businesses, are not conducive to a fair and efficient administration of cross-border insolvencies, impede the protection of the assets of the insolvent debtor against dissipation, and hinder maximization of the value of those assets. Moreover, the absence of predictability in the handling of cross-border insolvency cases impedes capital flow and is a disincentive to cross-border investment.
7. An increasing problem, both in terms of frequency and magnitude, is fraud by insolvent debtors, in particular through means such as concealment of assets or transfer of assets to foreign jurisdictions. The modern interconnected world makes such fraud easier to conceive and carry out. The mechanisms for cross-border cooperation established by the Model Law are designed to confront such international fraud.
8. To the extent that there is a lack of communication and coordination among courts and administrators from those jurisdictions concerned, it is more likely that assets will be dissipated, fraudulently concealed, or possibly liquidated. By contrast, mechanisms in national legislation for coordinated administration of cases of cross-border insolvency make it possible to adopt solutions that are sensible and in the best interest of the creditors and the debtor; the presence of such mechanisms in the law of a State are therefore perceived as advantageous for foreign investment and trade in that State.
III. THE MODEL LAW APPROACH AS A VEHICLE FOR THE HARMONIZATION OF LAWS
9. A model law is a legislative text that is recommended to States for incorporation into their respective national laws. Unlike an international convention, a model law does not require the enacting State to notify the United Nations or other States that may have also enacted it.
10. In incorporating the text of a model law into its system, the enacting State is free to modify or leave out some of the model provisions. Some modifications may be expected, in particular where the uniform text needs to be adapted to the national court and procedural system. In order to achieve a satisfactory degree of harmonization and certainty, however, it is recommended that States make as few changes as possible when incorporating a model law into their respective legal system.
IV. MAIN FEATURES OF THE MODEL LAW
A. Scope of Application
11. The Model Law applies in a number of cross-border insolvency situations. These include: (a) an inward-bound request for recognition of a foreign proceeding; (b) an outward-bound request from a court or administrator in the enacting State for recognition of an insolvency proceeding commenced under the laws of the enacting State; (c) coordination of concurrent proceedings in two or more States; and (d) participation of foreign creditors in insolvency proceedings taking place in the enacting State (art. 1).
B. Types of Foreign Proceedings Covered
12. To fall within the scope of the Model Law, a foreign insolvency proceeding needs to possess certain attributes. It should have its basis in insolvency-related law of the originating State, involve creditors collectively, provide for control or supervision of the assets and affairs of the debtor by a court or another official body, and reorganization or liquidation of the debtor should be the purpose of the proceeding (art. 2(a)).
13. Within those parameters, a variety of collective proceedings would be eligible for recognition, whether compulsory or voluntary, corporate or individual, whether for the purpose of winding-up or reorganization or those in which the debtor retains some measure of control over its assets, albeit under court supervision (e.g., suspension of payments; “debtor in possession”).
14. An inclusive approach is used also as regards the possible types of debtors covered by the Model Law. Nevertheless, the Model Law refers to the possibility of excluding from its scope of application certain types of entities, such as banks or insurance companies specially regulated with regard to insolvency under the laws of the enacting State (art. 1(2)).
C. Foreign Assistance for an Insolvency Proceeding Taking Place in the Enacting State
15. In addition to equipping the courts of the enacting State to deal with incoming requests for recognition, the Model Law authorizes the courts of the enacting State to seek assistance abroad on behalf of a proceeding taking place in the enacting State (art. 25). Provisions that grant authorization for the courts of the enacting State to seek cooperation abroad may help to fill a gap in legislation in some States. Without such legislative authorization, in some legal systems, the courts feel constrained from seeking such assistance abroad, which creates potential obstacles to a coordinated international response in case of cross-border insolvency.
16. Similarly, the Model Law may help an enacting State to fill a gap in its legislation as to the “outward” powers of persons appointed to administer insolvency proceedings under the local insolvency law. Article 5 authorizes those persons to seek recognition of, and assistance for, those proceedings from foreign courts.
D. Foreign Representative’s Access to Courts of the Enacting State
17. An important objective of the Model Law is to provide expedited and direct access for foreign representatives to the courts of the enacting State. The Model Law avoids the need to rely on cumbersome and time-consuming letters rogatory or other forms of diplomatic or consular communications, which might otherwise be required. This facilitates a coordinated, cooperative approach to cross-border insolvency and enables fast action when necessary.
18. In addition to establishing the principle of direct court access for the foreign representative, the Model Law:
establishes simplified proof requirements for seeking recognition and relief for foreign proceedings, which avoid time-consuming “legalization” requirements involving notarial or consular procedures (art. 15);
provides that the foreign representative has procedural standing for commencing an insolvency proceeding in the enacting State (under the conditions applicable in the enacting State) and that the foreign representative may participate in an insolvency proceeding in the enacting State (arts. 11 and 12);
subject to other requirements of the enacting State, confirms access by foreign creditors to the courts of the enacting State for the purpose of commencing in the enacting State an insolvency proceeding or participating in such a proceeding (art. 13);
gives the foreign representative the right to intervene in proceedings in the enacting State where such proceedings concern individual actions affecting the debtor or its assets (art. 24);
provides that the mere fact of a petition for recognition in the enacting State does not mean that the courts in that State have jurisdiction over all the assets and affairs of the debtor (art. 10).
E. Recognition of Foreign Proceedings
(a) Decision whether to recognize a foreign proceeding
19. The Model Law establishes criteria for determining whether a foreign proceeding is to be recognized (arts. 15-17) and provides that, in appropriate cases, the court may grant interim relief pending a decision on recognition (art. 19). The decision includes a determination whether the jurisdictional basis on which the foreign proceeding was commenced was such that it should be recognized as a “main” or instead as a “non-main” foreign insolvency proceeding. Procedural matters related to notice of the filing of an application for recognition or of the decision to grant recognition are not addressed by the Model Law; they remain to be governed by other provisions of law of the enacting State.
20. A foreign proceeding is deemed to be the “main” proceeding if it has been commenced in the State where “the debtor has the centre of its main interests.” This corresponds to the formulation in the European Union Convention on Insolvency Proceedings (art. 3 of that Convention), thus building on the emerging harmonization as regards the notion of a “main” proceeding. The determination that a foreign proceeding is a “main” proceeding may affect the nature of the relief accorded to the foreign representative.
(b) Effects of recognition and discretionary relief available to a foreign representative
21. Key elements of the relief accorded upon recognition of the representative of a foreign “main” proceeding include a stay of actions of individual creditors against the debtor or a stay of enforcement proceedings concerning the assets of the debtor, and a suspension of the debtor’s right to transfer or encumber its assets (art. 20(1)). Such stay and suspension are “mandatory” (or “automatic”) in the sense that either they flow automatically from the recognition of a foreign main proceeding or, in the States where a court order is needed for the stay or suspension, the court is bound to issue the appropriate order. The stay of actions or of enforcement proceedings is necessary to provide a “breathing space” until appropriate measures are taken for reorganization or fair liquidation of the assets of the debtor. The suspension of transfers is necessary because in the modern, globalized economic system it is possible for multi-national debtors to move money and property across boundaries quickly. The mandatory moratorium triggered by the recognition of the foreign main proceeding provides a rapid “freeze” essential to prevent fraud and to protect the legitimate interests of the parties involved until the court has an opportunity to notify all concerned and to assess the situation.
22. Exceptions and limitations to the scope of the stay and suspension (e.g. exceptions for secured claims, payments by the debtor made in the ordinary course of business, set-off, execution of rights in rem) and the possibility of modifying or terminating the stay or suspension are determined by provisions governing comparable stays and suspensions in insolvency proceedings under the laws of the enacting State (art. 20(2)).
23. In addition to such mandatory stay and suspension, the Model Law authorizes the court to grant “discretionary” relief for the benefit of any foreign proceeding, whether “main” or not (art. 21). Such discretionary relief may consist of, for example, staying proceedings or suspending the right to encumber assets (to the extent such stay and suspension have not taken effect automatically under art. 20), facilitating access to information concerning the assets of the debtor and its liabilities, appointing a person to administer all or part of those assets, and any other relief that may be available under the laws of the enacting State. Urgently needed relief may be granted already upon filing an application for recognition (art. 21).
(c) Protection of creditors and other interested persons
24. The Model Law contains provisions, such as the following, which protect the interests of the creditors (in particular, local creditors), the debtor and other affected persons: the availability of temporary relief upon application for recognition of a foreign proceeding or upon recognition is subject to the discretion of the court; it is expressly stated that in granting such relief the court must be satisfied that the interests of the creditors and other interested persons, including the debtor, are adequately protected (art. 22(1)); the court may subject the relief it grants to conditions it considers appropriate; and the court may modify or terminate the relief granted, if so requested by a person affected thereby (art. 22(2) and (3)).
25. In addition to those specific provisions, the Model Law in a general way provides that the court may refuse to take an action governed by the Model Law if the action would be manifestly contrary to the public policy of the enacting State (art. 6).
26. Questions of notice to interested persons, while closely related to the protection of their interests, are in general not regulated in the Model Law. Thus, these questions are governed by the procedural rules of the enacting State, some of which may be of a public-order character. For example, the law of the enacting State will determine whether any notice is to be given to the debtor or another person of an application for recognition of a foreign proceeding and the time period for giving the notice.
F. Cross-border Cooperation
27. A widespread limitation on cooperation and coordination between judges from different jurisdictions in cases of cross-border insolvency is derived from the lack of a legislative framework, or from uncertainty regarding the scope of the existing legislative authority, for pursuing cooperation with foreign courts.
28. Experience has shown that, irrespective of the discretion courts may traditionally enjoy in a State, existence of a specific legislative framework is useful for promoting international cooperation in cross-border cases. Accordingly, the Model Law fills the gap found in many national laws by expressly empowering courts to extend cooperation in the areas governed by the Model Law (arts. 25–27).
29. For similar reasons, provisions are included authorizing cooperation between a court in the enacting State and a foreign representative, and between a person administering the insolvency proceeding in the enacting State and a foreign court or a foreign representative (art. 26).
30. The Model Law lists possible forms of cooperation and provides the legislator with an opportunity to list additional forms (art. 27). It is advisable to preserve the list as an illustrative rather than an exhaustive list, when it is enacted, so as not to stymie the ability of courts to fashion remedies specific to the circumstances of each case.
G. Coordination of Concurrent Proceedings
(a) Jurisdiction to commence a local proceeding
31. The Model Law imposes virtually no limitations on the jurisdiction of the courts in the enacting State to commence or continue insolvency proceedings. Pursuant to article 28, even after recognition of a foreign “main” proceeding, jurisdiction remains with the courts of the enacting State to institute an insolvency proceeding if the debtor has assets in the enacting State. If the enacting State wishes to restrict its jurisdiction to those cases where the debtor has, in addition to assets, also an establishment in the enacting State, the adoption of such a restriction would not be contrary to the policy underlying the Model Law.
32. In addition, the Model Law deems the recognized foreign main proceeding to constitute proof that the debtor is insolvent for the purposes of commencing local proceedings (art. 31). This rule would be helpful in those legal systems in which commencement of an insolvency proceeding requires proof that the debtor is in fact insolvent. Avoidance of the need for repeated proof of financial failure reduces the likelihood that a debtor may delay the commencement of the proceeding long enough to conceal or carry away assets.
(b) Coordination of relief when more than one proceeding take place concurrently
33. The Model Law deals with coordination between a local proceeding and a foreign proceeding concerning the same debtor (art. 29) and facilitates coordination between two or more foreign proceedings concerning the same debtor (art. 30). The objective of the provisions is to foster coordinated decisions that would best achieve the objectives of both proceedings (i.e., maximization of the value of the debtor’s assets or the most advantageous restructuring of the enterprise). In order to achieve satisfactory coordination and to be able to adapt relief to changing circumstances, the court is covered by the Model Law in all situations, including those which limit the effects of foreign proceedings in the face of local proceedings that are directed to cooperate to the maximum extent possible with foreign courts and the foreign representatives (arts. 25 and 30).
34. When the local insolvency proceeding is already underway at the time that recognition of a foreign proceeding is requested, the Model Law requires that any relief granted for the benefit of the foreign proceeding must be consistent with the local proceeding. Furthermore, the existence of the local proceeding at the time the foreign main proceeding is recognized prevents the operation of article 20. When there is no local proceeding pending, article 20 mandates the stay of individual actions or enforcement proceedings against the debtor and a suspension of the debtor’s right to transfer or encumber its assets.
35. When the local proceeding begins subsequent to recognition or application for recognition of the foreign proceeding, the relief that has been granted for the benefit of the foreign proceeding must be reviewed and modified or terminated if inconsistent with the local proceeding. If the foreign proceeding is a main proceeding, the stay and a suspension, as mandated by article 20, must also be modified or terminated if inconsistent with the local proceeding.
36. When the court is faced with more than one foreign proceeding, article 30 calls for tailoring relief in such a way that will facilitate coordination of the foreign proceedings; if one of the foreign proceedings is a main proceeding, any relief must be consistent with that main proceeding.
37. Coordination of concurrent proceedings is also enhanced by the rule on rate of payment of creditors (art. 32). It provides that a creditor, by claiming in more than one proceeding, does not receive more than the proportion of payment that is obtained by other creditors of the same class.
V. ASSISTANCE FROM THE UNCITRAL SECRETARIAT
38. The UNCITRAL Secretariat will assist States that request technical consultations for the preparation of legislation based on the Model Law. Further information may be obtained from the UNCITRAL Secretariat, Vienna International Centre, P.O. Box 500, A-1400 Vienna, Austria; telephone (43-1) 26060-4060; fax (43-1) 26060-5813; electronic mail: firstname.lastname@example.org; Internet home page: http://www.un.or.at/uncitral.
VI. LEGISLATIVE HISTORY OF THE MODEL LAW
39. The project that culminated in the Model Law on Cross-Border Insolvency was initiated in UNCITRAL in close cooperation with the International Association of Insolvency Practitioners (INSOL) and benefited from its expert advice during all stages of the preparatory work. Active consultative assistance during the formulation of the Model Law was received also from Committee J (Insolvency) of the Section on Business Law of the International Bar Association (IBA).
40. Prior to the decision by the Commission to undertake work on cross-border insolvency, UNCITRAL and INSOL held two international colloquia of insolvency practitioners, judges, government officials and representatives of other interested sectors.1 The suggestion arising from those meetings was that work by the Commission should have the limited but useful goal of facilitating judicial cooperation, court access for foreign insolvency administrators and recognition of foreign insolvency proceedings.
41. When the Commission decided in 1995 to develop a legal instrument relating to cross-border insolvency, it entrusted this task to the Working Group on Insolvency Law, one of the Commission’s three inter-governmental subsidiary bodies.2 The Working Group devoted four two-week sessions to the project.3
42. Before the session of the Commission in May 1997, at which the Model Law was adopted, another international meeting of practitioners was held to discuss the draft text as prepared by the Working Group. The participants (mostly judges, judicial administrators and government officials) generally considered that the model legislation, when enacted, would constitute a major improvement in dealing with cross-border insolvency cases.4
43. The final negotiations on the draft text took place during the thirtieth session of the Commission (Vienna, Austria, 12-30 May 1997) and the Model Law was adopted by consensus on 30 May 1997.5 In addition to the 36 States members of the Commission, representatives of 40 observer States and 13 international organizations participated in the deliberations of the Commission and the Working Group.
As local governments are usually vested with powers (e.g., taxation) that provide a source of income but that cannot be transferred to their creditors, a special regime normally provides for a restructuring of their liabilities, but not a liquidation of such entities.
As will be discussed in the subsection of chapter 4 entitled “The Commencement Criterion,” countries that rely on unitary proceedings may also allow a debtor (but not the creditor) to initiate the proceedings even before the debtor has ceased making payments generally.
Some countries also allow for the creation of different classes of secured creditors on the basis that, depending on the nature of their claims, they may have different economic interests from each other.
The first was the UNCITRAL-INSOL Colloquium on Cross-Border Insolvency, Vienna, 17–19 April 1994 (report on the Colloquium: doc. A/CN.9/398, UNCITRAL Yearbook, vol. XXV: 1994, part two, V, B; the proceedings of the Colloquium are published in International Insolvency Review, Special Conference Issue 1995, vol: 4; considerations of the Commission relating to the Colloquium: doc. A/49/17, paras. 215–222, UNCITRAL Yearbook, vol. XXV: 1994, part one, A). Subsequently, an international meeting of judges was held specifically to elicit their views: the UNCITRAL-INSOL Judicial Colloquium on Cross-Border Insolvency, Toronto, 22–23 March 1995 (report on the Judicial Colloquium: doc. A/CN.9/413, UNCITRAL Yearbook, vol. XXVI: 1995, part two, IV, A; considerations of the Commission relating to the Judicial Colloquium: doc. A/50/17, paras. 382–393, UNCITRAL Yearbook, vol. XXVI: 1995, part one, A).
The eighteenth session (Vienna, 30 October – 10 November 1995), report: document A/CN.9/419 (UNCITRAL Yearbook, vol. XXVII: 1996, part two); nineteenth session (New York, 1–12 April 1996), report: document A/CN–9/422 (UNCITRAL Yearbook, vol. XXVII: 1996, part two); twentieth session (Vienna, 7–18 October 1996), report: document A/CN.9/433 (UNCITRAL Yearbook, vol. XXVIII: 1997, part two); twenty–first session (New York, 20–31 January 1997), report: document A/CN.9/435 (UNCITRAL Yearbook, vol. XXVIII: 1997, part two).
The Second UNCITRAL-INSOL Multinational Judicial Colloquium on Cross-Border Insolvency was held from 22 to 23 March 1997 in conjunction with the 5th World Congress of INSOL, New Orleans, 23–26 March 1997. A brief account of the Colloquium appears in doc. A/52/17, paras. 17–22 (UNCITRAL Yearbook, vol. XXVIII: 1997, part one, A).
The Model Law is also published in Official Records of the General Assembly, Fifty-second Session, Supplement No. 17 (A/52/17, annex I) (UNCITRAL Yearbook, vol. XXVIII: 1997, part three). The discussion at the thirtieth session concerning the Model Law is reproduced in doc. A/52/17, paras. 12–225 (UNCITRAL Yearbook, vol. XXVIII: 1997, part one, A).