Break for the border

A significant gap in the Insolvency Act 2000 should be filled on 1 April. Section 14 of the act left space to bring in the ‘model law’ on cross-border insolvency of the United Nations Commission on International Trade Law (Uncitral). The model law will be brought in by the Cross-Border Insolvency Regulations 2006, although its adoption onto the statute books of both England and Wales and Scotland remains subject to the formal approval of the Lord Chancellor, the Scottish ministers and the results of a Department of Trade and Industry (DTI) consultation paper.

The model law is, according to the consultation paper, intended to be a procedural code promoting:
1. cooperation between the courts and other competent authorities in the UK and foreign states involved in cases of cross-border insolvency;
2. greater legal certainty for trade and investment;
3. fair and efficient administration of cross-border insolvencies, protecting the interests of all creditors and other interested persons, including the debtor;
4. protection and maximisation of the value of the debtor’s assets; and
5. facilitation of the rescue of financially troubled businesses, thereby protecting investment and preserving employment.

The background

The history of Uncitral’s model law on cross-border insolvency helps explain its purpose and effect. Uncitral was set up in 1966 to suggest ways of improving international trade. Lending and trade have become increasingly globalised, as have the corresponding problems arising from non-payment of debt. Among the greatest problems have been the inabilities of domestic courts to recognise the rights of foreign creditors and insolvency officeholders, and the lack of black-letter law supporting the efforts of courts to cooperate in supervising the administration of debtors’ estates. This has often led at best to clunky procedures being slowly and expensively applied, while assets and information slip away across borders. At worst, courts have simply had to decline assistance to foreign creditors, or representatives appointed to act on their behalf in insolvencies, due to a lack of recognition or jurisdiction.

After much discussion at Uncitral about the practical problems thrown up in international insolvencies, and some judicious borrowing from Section 304 of the US Bankruptcy Code of 1978, the UN adopted the model law in December 1997. It is intended to provide not a pattern for standardisation of domestic or substantive laws, but rather a broad framework for procedural recognition and cooperation by, but not necessarily just among, the states that adopt it. The model law was first brought into force by Mexico in May 2000. It has since been taken on by the British Virgin Islands, Eritrea, Japan, Poland, Romania, South Africa and Montenegro. It was most notably adopted in October 2005 by the US as Chapter 15 of the US Bankruptcy Code.

The model code is not, of course, the UK’s first venture into the field of recognition and enforcement of rights in international insolvencies. The common law has long attempted to recognise the position of foreign stakeholders in UK insolvencies. Section 426 of the Insolvency Act 1986 provided power to the courts in the UK to cooperate in insolvency proceedings with courts from a limited number of predominantly Commonwealth territories. Most significantly for many UK-based insolvency practitioners, the European Community (EC) Regulation on Insolvency Proceedings 2000 has provided a basis for the recognition and regulation of insolvency processes within the member states of the EC (except Denmark).

Similarities with EC regulation

In many important points, the model law uses the same language and concepts as the EC regulation. Both draw, for example, on the concept of the court having jurisdiction over the territory where a debtor has its centre of main interests (COMI) as being the appropriate court in which to open main insolvency proceedings, and both contain a rebuttable presumption that the COMI of a corporate debtor is where it has its registered office. One other common point is that both the EC regulation and the model law avoid any formal definition of what constitute groups of companies, or provide guidance for finding where the COMI of a group is based or how to deal with its debts. Most commentators feel that this omission was made deliberately to leave the courts with discretion to provide solutions on a case-by-case basis for a thorny area of law to which the legislators could find no universal solution.

It is very much to be hoped that, as case law evolves in which principles and definitions compatible between the model law and the EC regulation are considered, the emerging jurisprudence will be applicable to both systems. The Uncitral model law and the EC regulation are both drafted in broad terms to allow courts to have flexibility in the interpretation and application of their provisions.

And the differences…

There are considerable differences between the EC regulation and the code, the most obvious of which is that the EC regulation applies to insolvencies among the member states of the EC (except Denmark) and the model code appears to be directed at cooperation with all foreign courts and foreign stakeholders with an interest in matters governed or affected by UK insolvency law. It is a matter of debate as to whether the model code provides automatic recognition of the interests of all foreign courts, creditors and representatives, or only those in territories that have adopted the model code and where mutual recognition of the interests of stakeholders in foreign insolvencies from the UK is possible.

There are two attractive reasons which suggest that, once a country has adopted the model code, it can give recognition and assistance to relevant parties from countries that have not adopted the code.

First, much of the early commentary and working papers for the model law acknowledged that the imperative for a global law was so strong that the first states adopting the code would need the courage to blink first, adopting the code even if their own citizens would not immediately gain from similar rights abroad.

Second, the DTI’s consultation paper appears to endorse this approach, stating: “Over time, when other States implement the Model Law, GB officeholders will progressively enjoy the same benefits abroad, in terms of reduced administrative costs incurred in recovering assets from overseas, thereby increasing funds available for distribution to creditors.”

In the tempestuous world of modern cross-border insolvencies, one might indeed exclaim: “Oh brave new world that has such people in it!”

Mark Parkhouse is a partner at Reed Smith