UNCITRAL Model Law on Cross-Border Insolvency
The United Nations Commission on International Trade Law (UNCITRAL) has a mandate from the General Assembly of the United Nations to harmonize and unify the law of international trade. As part of this programme of harmonization, the commission has developed a Model Law on Cross-Border Insolvency (“the Model-Law”).
The UNCITRAL was established by the General Assembly of the United Nations (UN) in 1966 [note 1]. The General Assembly recognised that differences in national laws regarding international trade were barriers to the effective flow of trade. The purpose of UNCITRAL was to progress schemes for the harmonisation and unification of laws on international trade. The Commission is made up of 60 member states elected by the General Assembly and is structured so as to be representative of the various geographic regions and economic and legal systems of the World. The membership revolves every three years.
As part of UNCITRAL’s mandate to harmonise and unify the national laws regarding international trade, it has developed the Model Law on Cross-Border Insolvency (“the Model Law”), which was adopted by UNCITRAL on 30 May 1997. Similar in many ways to the EC Regulation on Insolvency Proceedings (see Chapter 41), particularly with regards to its purpose and scope, there is one key difference in that the adoption of the Model Law by nation states requires an active process of enactment or similar, rather than the automatic implementation of the EC Regulation throughout the EU.
The Model Law is not a law in its own right and has no force; rather it provides (as the name suggests) a legal text for incorporation into national law. States may, if they wish, modify or leave out provisions in order to adapt the Model Law to particular national circumstances.
Against a background of increasing international trade, the absence of international co-ordination in respect of insolvency matters can often lead to an inability by office holders or relevant authorities in dealing with assets effectively, resulting in the concealing or removal of assets and a reduced return to creditors or, as the case may be, a reduced chance of rescuing a failing business. The inability to effectively progress matters relating to cross-border insolvency may be due to the need to follow complicated and unfamiliar procedural and judicial systems, or may be as a result of an absence of any legal framework allowing cooperation in the state in which an insolvent has an interest.
The overall purpose of the Model Law is to provide effective mechanisms for dealing with cases of cross-border insolvency so as to promote the objectives of:
The countries that have, so far, adopted the Model Law are:
Other countries are likely to adopt the Model Law. The up to date list of adoptees can be found at http://www.uncitral.org/uncitral/en/uncitral_texts/insolvency/1997Model_status.html
The involvement of an official receiver in an insolvency with any cross-border dimension is still rare. That said, there is an increasing expansion of international trade and it is almost inevitable that official receivers will encounter more cases with an international aspect – whether this be in respect of assets outside the jurisdiction, or an insolvent with creditors overseas.
In this respect the assistance and cooperation of the authorities in those countries that have implemented the Model Law into their own national systems of legislation is likely to be much easier to obtain. It is not possible to discuss within this chapter the detail of the differences relating to the method and practical aspects in which each country has incorporated the Model Law. Deviation from the text of the Model Law is discouraged in the guidance issued by the UN to national governments and, therefore, it can be expected that differences between the text of the Model Law and national legislation implementing it are the exception rather than the rule.
For the purpose of the aspects of the Model Law which relate to the process for dealing with insolvencies overseas the official receiver would be considered a “foreign representative” and references in this part of the chapter to the powers of a foreign representative can be taken to include the official receiver.
An overview of the main provisions of the Model Law follows in paragraphs 42.37 to 42.54
The Model Law may be applied in a number of cross-border insolvency situations, covering:
The Model Law gives countries the option to exclude certain sectors (such as banks or insurance companies) from the provisions of the Model Law.
The Model Law gives the definition of qualifying foreign proceedings as “a collective judicial or administrative proceeding in a foreign state, including an interim proceeding, pursuant to a law relating to insolvency in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganisation or liquidation.” [note 4].
This definition is intended to include proceedings which are compulsory or voluntary, corporate or individual, winding-up or reorganisation. Measures where the debtor retains some court-supervised control over assets are not excluded.
The Model Law has provisions to allow for the speedy and direct access to courts for foreign representatives [note 5] (foreign representative is defined as “a person or body, including one appointed on an interim basis, authorised in a foreign proceeding to administer the reorganisation or the liquidation of the debtor’s assets or affairs or to act as a representative of the foreign proceeding.”) [note 6].
A foreign representative (see paragraph 42.39) is entitled under the Model Law to apply to commence a proceeding if the conditions for commencing such a proceeding are otherwise met [note 7], and/or to participate in proceedings regarding the debtor [note 8].
Under the Model Law, foreign creditors are granted the same rights regarding the commencement of, and participation in, proceedings as creditors in the enacting state [note 9]. The Model Law allows states to make provisions to ensure that the ranking of claims of creditors in the state are not affected by the granting of access or participation to foreign creditors. This said, foreign creditors should not be ranked lower than general unsecured creditors, unless the debt to which their claim relates would normally be ranked lower than general unsecured creditors [note 10].
There are provisions under the Model Law to ensure that foreign creditors are notified of insolvency proceedings in the same way as creditors in the enacting state, or by individual notification if that is not the method used in the state. This is to ensure foreign creditors are not in a less advantageous situation than local creditors. That notification shall indicate a reasonable time for the submission of claims and specify the place for their filing, indicate whether secured creditors need to file their secured claims and contain any other information required to be included under the law of that state. There are provisions allowing for discretion as to the method of notification if individual notification would entail excessive cost or would not be feasible under the circumstances [note 11].
The effects of the Model Law are largely dependent on whether the proceedings to which they relate are “foreign main proceedings” or “foreign non-main proceedings”. It is important, therefore, to understand the difference between the two types of proceeding. A foreign main proceeding is one in a state where the debtor has their “centre of main interests” (COMI) [note 12] COMI is not defined beyond the presumption, subject to evidence to the contrary, that the debtor’s registered office, or habitual residence is the centre of main interests [note 13]).
A foreign non-main proceeding (a foreign proceeding other than a main proceeding) is one in a state where the debtor has an establishment [note 14] (which is defined as “any place of operations where the debtor carries out a non-transitory economic activity with human means and goods or services.” [note 15]. The presence of assets is not, in itself, sufficient to meet the definition of “establishment”.
The Model Law states that a foreign representative (see paragraph 42.39) may apply to court for recognition of the foreign proceeding in which the representative has been appointed [note 16]. Such application must be accompanied by:
Additionally, the application must be accompanied by a statement identifying all foreign proceedings in respect of the debtor that are known to the foreign representative [note 17].
The court may require a translation of documents supplied in support of the application for recognition into an official language of the state [note 18] [note 19]. See paragraph 32.3.39 of Chapter 32 – Employment of Agents for details of the Service’s translation contract.
Following the satisfaction of the requirements set out in paragraph 42.44 the court is obliged to recognise the foreign proceeding and must decide if the proceeding is to be recognised as a “foreign main proceeding” or a “foreign non-main proceeding” (see paragraph 42.43) [note 20]. The court is allowed, if circumstances require, to take interim measures to protect the estate whilst the application for recognition (see paragraph 42.44) is decided upon [note 21].
Where the recognised proceeding is a foreign main proceeding (see paragraph 42.43) the effects are that:
There are provisions to allow states to qualify in national laws implementing the Model Law the scope of any proceedings to stay or suspend proceedings. Additionally, the stay or suspension does not affect the right to commence individual actions (such as set-off or rights under secured claims) or proceedings to the extent necessary to preserve a claim against the debtor [note 23].
See paragraph 42.47 for further effects in foreign main proceedings
The court may also, at the request of the foreign representative, entrust the distribution of all or part of the debtor’s assets located in the state to the foreign representative or another person designated by the court, provided that the court is satisfied that the interests of creditors in the state are adequately protected [note 25].
In granting relief to a representative of a foreign non-main proceeding, the court must be satisfied that the relief relates to assets that, under the law of the state, should be administered in the foreign non-main proceeding, or concerns information required in that proceeding [note 26].
In granting or denying relief, or in modifying or terminating relief the court must be satisfied that the interests of the creditors and other persons (including the debtor) are adequately protected. The court may subject relief to conditions as it sees fit, or modify or terminate such relief, whether on its own motion or on the application of the party affected [note 27].
Whilst many countries already have provisions in legislation allowing for the cooperation with foreign courts, many others do not and, for those that do, there is often uncertainty as to the scope of the existing provisions, or the existing provisions are complicated and time-consuming.
The Model Law expressly empowers courts to extend cooperation in the areas covered by the Model Law without the need for traditional formalities such as communication via higher courts or diplomatic or consular channels [note 28]. The Model Law contains an illustrative list of the co-operation envisaged. This list is not intended to be exhaustive and allows courts room for movement as appropriate:
The recognition of a foreign main proceeding under the Model Law does not preclude a state from opening local proceedings (i.e., local proceedings brought by a local creditor/authority against a local debtor) against a debtor if that debtor has assets in the state. The state may restrict its jurisdiction to debtors with an establishment and assets, as this would not be contrary to the underlying policy of the Model Law [note 30].
Where a foreign proceeding and a proceeding under the law of the local state are taking place concurrently, the court is required to seek cooperation under the provisions outlined in paragraph 42.49. The general principle is to give primacy to the local proceeding [note 31].
Where the local proceeding is already taking place at the time of the application for recognition of a foreign proceeding, any relief granted in lieu of recognition of foreign proceedings (see paragraph 42.6 or of the type outlined in paragraph 42.47 must be consistent with the law of state of the local proceeding. If the foreign proceeding is a foreign main proceeding (see paragraph 42.43) then the provisions outlined in paragraph 42.46 do not apply [note 32].
When the local proceeding in the local state commences after recognition of a foreign proceeding, or after filing of the application for such recognition then any relief granted in lieu of recognition of foreign proceedings (see paragraphs 42.45 and 42.46) or of the type outlined in paragraph 42.47 must be reviewed by the court and shall be modified or terminated if inconsistent with the proceeding in the state; and if the foreign proceeding is a foreign main proceeding, the stay or suspension referred to in paragraph 42.46 shall be modified if inconsistent with the local proceeding [note 33].
Where there is more than one foreign proceeding taking place concurrently, the court is required to seek cooperation under the provisions outlined in paragraph 42.49. The general principle is to give primacy to the foreign main proceeding.
Additionally, where relief is granted to a foreign representative of a foreign non-main proceeding after recognition of a foreign main proceeding, any relief granted in lieu of recognition of proceedings (see paragraph 42.45) or of the type outlined in paragraph 42.47 must be consistent with the foreign main proceeding [note 34].
If a foreign main proceeding is recognised after recognition, or after the filing of an application for recognition, of a foreign non-main proceeding, any relief granted in lieu of recognition of foreign proceedings (see paragraph 42.45) or of the type outlined in paragraph 42.47 must be reviewed by the court and shall be modified or terminated if inconsistent with the foreign main proceeding [note 35].
If, after recognition of a foreign non-main proceeding, another foreign non-main proceeding is recognised, the court is required to grant, modify or terminate relief for the purpose of facilitating coordination of the proceedings [note 36].
In the absence of evidence to the contrary, recognition of a foreign main proceeding is, for the purpose of commencing a local proceeding, proof that the debtor is insolvent. This presumption does not apply where recognition has been given to a foreign non-main proceeding [note 37].
Before a creditor can claim and receive a dividend in a local proceeding, it must declare any sums received from proceedings abroad and may not receive a payment for the same claim under a local proceeding regarding the same debtor, so long as the payment to the other creditors of the same class is proportionally less than the payment already received. If the payment to local creditors is proportionally more than received in the foreign proceeding then the creditor may receive payment amounting to the difference between the two figures. For example, where an unsecured creditor has received 10% of its claim in a foreign proceeding and the creditor also participates in the insolvency proceeding in the enacting state, where the rate of distribution is 20%, in order to put the creditor in an equal position to the other creditors in the enacting state, a distribution of 10% would be received by the creditor.
These provisions do not affect the rights of secured creditors [note 38].
The means for collecting and disseminating court judgements and arbitral awards that relate to legal texts emanating from the work of UNCITRAL is known as ‘Case Law on UNCITRAL Texts (CLOUT)’.
The collection of court judgements and arbitral awards and the preparation of abstracts thereon is carried out by National Correspondents designated by the states that are party to an UNICTRAL convention, or states that have enacted legislation based on an UNCITRAL model law, as the case may be.
The primary task of the National Correspondent is to collect judgments issued by the courts in the country in which they are based, and to prepare abstracts and forward them to the Secretariat of UNCITRAL. The abstracts are then translated into, and published in, all six languages of the UN. They are made available on the relevant page of the CLOUT website (http://www.uncitral.org/uncitral/en/case_law.html).
As the UNCITRAL Model Law on Cross Border Insolvency has been enacted within Great Britain (see Part 3), The Insolvency Service has deemed it appropriate to appoint a National Correspondent in respect of cross-border insolvency matters. The role has been taken on by Professor Ian F Fletcher who is a Professor of International Commercial Law at the University College London and, also, a barrister at 3-4 South Square, Gray’s Inn, London.
In order that Professor Fletcher can carry out his role as designated National Correspondent for Great Britain effectively, it is important that he becomes aware of any cases where the Model Law is referred to or otherwise used (see paragraph 42.57). This would include those cases that do not reach court (where, for example, because a party complies in relation to some act due to the provisions of the Model Law).
Where the official receiver as liquidator or trustee is dealing with a case where there is an application to court relating to the Model Law, he/she should supply the following information to Professor Fletcher (see paragraph 42.56):
This information should be sent to Professor Fletcher at:
Faculty of Laws
University College London