The Model Law on Cross-Border Insolvency turns 25

The Model Law on Cross-Border Insolvency turns 25

A time for celebration and recalibration in pursuit of a global approach to recognition and judicial cooperation

By Scott Atkins (Norton Rose Fulbright Australia and INSOL International) and John Martin (Norton Rose Fulbright Australia and International Insolvency Institute)

Introduction

30 May 2022 marks the 25th anniversary of the adoption by the United Nations Commission on International Trade Law (UNCITRAL) of the Model Law on Cross-Border Insolvency (MLCBI). 

This is a timely opportunity to celebrate the significant contribution the MLCBI has made to achieving more efficient, cost-effective cross-border restructuring and insolvency processes involving creditors and assets in multiple jurisdictions – putting in place an international framework for recognition, cooperation and coordination according to clear and well-understood principles and legal concepts, and ensuring greater consistency and predictable outcomes for creditors and investors. 

In doing so, the MLCBI has played a direct role in increasing the likelihood of corporate and business rescue – by centralising the rescue process and avoiding the piecemeal breakup of debtors’ assets in numerous locations – and enhanced creditor returns. This has also had important ‘macro’ implications, supporting broader investment and financial stability and economic growth. 

So too has the MLCBI contributed to greater geopolitical cooperation, people-to-people linkages and judicial capacity-building and knowledge exchanges regionally and globally. 

Yet, despite the substantial contribution the MLCBI has made, it is important now for renewed efforts to be made to encourage greater uptake of the MLCBI beyond the current 50 signatory States, and to also pursue in tandem other opportunities to enhance consistency, recognition, coordination, predictability and doctrinal certainty under a global, best practice cross-border restructuring and insolvency framework. 

The particular focus ought to be on adoption and implementation of complementary cross-border protocols under the UNCITRAL Model Law on the Recognition and Enforcement of Insolvency-Related Judgments (MLIRJ) and the UNCITRAL Model Law on Enterprise Group Insolvency (MLEGI), as well as substantive court cooperation and communication protocols developed by the International Insolvency Institute (III), the American Law Institute (ALI), the European Union (EU) and the Judicial Insolvency Network (JIN). Clarifying the applicable law in an insolvency proceeding will also be an important priority focus area. 

These pursuits are all the more important now in a truly global economy shaped by digital transformation and the proliferation of complex corporate structures permeating multiple jurisdictions and facilitating the conduct of business not so much across borders, but more aptly without any borders at all. Indeed, the reality is that larger insolvencies will almost invariably now have at least some cross-border elements. A global cross-border restructuring and insolvency framework that continues to evolve and adapt to rapidly changing economic, financial and social circumstances is rightly regarded as a foundational and essential part of future economic growth and prosperity.

Theoretical and policy underpinnings

Cross-border insolvency proceedings involving one or more debtors with businesses and creditors in a number of different locations across the world has traditionally given rise to two competing policy approaches to how those proceedings should be managed by local courts. 

On one side of the ledger is the universalist approach, which favours the operation of a single insolvency proceeding extending on a worldwide basis. This avoids the need to conduct multiple processes simultaneously, and therefore leads to greater efficiency and cost savings while minimising the risk of conflicting laws and legal approaches. As Lord Hoffman noted in Cambridge Gas Transport Corporation v Official Committee of Unsecured Creditors of Navigator Holdings plc,¹ universalism allows ‘the foreign office holder or the creditors to avoid having to start parallel insolvency proceedings and to give them the remedies to which they would have been entitled if the equivalent proceedings had taken place in the domestic forum’.²

A pure universalist approach permits the conduct of only a single insolvency process in the debtor’s home country which has worldwide effect, without allowing the possibility of one or more ancillary proceedings where foreign creditors or property are located. 

On the other end of the spectrum is territorialism, an approach whereby local courts separately administer and distribute assets and determine creditors’ rights in every jurisdiction in which those assets and creditors are located according to the priorities provided for under local laws. 

In the end, a best practice insolvency regime has typically favoured the principle of ‘modified universalism’, under which a main proceeding opened in the debtor’s home country is mutually recognised in other jurisdictions where the debtor has assets and creditors unless doing so would be manifestly contrary to the local laws and policies of those other jurisdictions. Modified universalism also recognises a role for ancillary proceedings to be opened in those other jurisdictions, but only to the extent they help to facilitate the administration of the main proceeding – for example, in enabling the recovery or realisation of assets to maximise value as part of coordinated overarching restructuring or insolvency process. 

What led to the adoption of the MLCBI?

Prior to the enactment of the MLCBI, recognition and cooperation in cross-border insolvency matters was dealt with primarily under general law concepts developed by courts. In common law jurisdictions, resort could be had to the doctrine of comity, while in civil law jurisdictions, the exequatur procedure enabled the recognition and enforcement of orders between different jurisdictions. 

Some jurisdictions also had in place legislation (which continues to apply even in those jurisdictions where the MLCBI has been implemented, such as Australia) setting out what are known as ‘aid and auxiliary provisions’. Essentially, under these provisions, upon receipt of a letter of request from a foreign court in a list of statutorily prescribed jurisdictions (the letter having been issued upon the application of a foreign insolvency practitioner), the local court is required to act in aid of and be auxiliary to the foreign court in all external administration matters.³

The difficulty with provisions of this kind is that they leave a very broad discretion for courts to decide whether to so act, and they lack predictable outcomes and the use of common, well-understood concepts and elements required to establish a clear basis for recognition and the granting of ancillary relief to support insolvency practitioners involved in the administration of complex cross-border restructuring and insolvency proceedings. Even in cases where the legislation casts the provision of aid as a mandatory obligation, it does not prescribe the form of relief or the range of orders that may be made.⁴

The end result of these general law and legislative processes – operating on a national level in the absence of a coherent international recognition and cooperation framework – is aptly described by UNCITRAL: [I]nadequate and inharmonious legal approaches, which 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 maximisation of the value of those assets. Moreover, the absence of predictability in the handling of cross-border insolvency cases can impede capital flow and be a disincentive to cross-border investment.⁵

Benefits of the MLCBI Framework

In contrast, the MLCBI sets out an approach to recognition and cooperation based on clearly defined and familiar concepts. It adopts a modified universalist system, seeking to achieve the key elements of access, recognition, assistance (or relief) and cooperation. This essentially provides for: (i) the ability of a local insolvency practitioner to apply to courts of foreign jurisdictions to obtain recognition of an insolvency process being undertaken in the local jurisdiction;⁶ (ii) the grant of recognition if that insolvency process is either a ‘foreign main proceeding’ (in cases where an insolvency process is taking place in a State where the debtor has its ‘centre of main interests’) or a ‘foreign non-main proceeding’ (in cases where the insolvency process is taking place in a State where the debtor has an ‘establishment’);⁷ (iii) different consequences and entitlements to ancillary relief depending on the type of proceeding recognised (with a mandatory automatic stay on enforcement and execution and a suspension on the right to transfer, encumber or dispose of assets of the debtor only upon recognition as a foreign main proceeding);⁸ (iv) discretionary interim relief, including by way of an interim enforcement moratorium and a stay of execution orders pending the determination of an application for recognition;⁹ and (v) a framework for cooperation and communication between courts.¹⁰

As noted, this framework leads to greater efficiency and cost-savings that can increase the return for creditors through greater coordination in the collection and distribution of assets, the concentration of proceedings and the avoidance of duplicate insolvency proceedings and multiple court applications, as well as potentially inconsistent court orders. 

This also increases the likelihood of debtors that are viable in the long-term despite interim financial distress being able to trade out of their difficulties and continue as going concerns under restructured business arrangements. In the end, that outcome is in the interests of creditors collectively, and also helps to preserve employment and promote investment security. 

Indeed, in the latter regard, achieving predictable cross-border insolvency outcomes under a clear and consistent recognition and cooperation framework incentivises continued equity and debt finance – on the basis that investors and creditors can be confident that there is an orderly system for protecting and recognising their rights in the event of default – in the context of the global expansion of trade and investment and the flow of funds across borders. 

This, in turn, leads to greater financial and economic stability and long-term growth. 

A facilitative framework for judicial cooperation is also important in promoting capacity building between jurisdictions and judicial systems. The mutual exchange of information, knowledge and expertise on a judicial level is ultimately critical in achieving a working restructuring and insolvency system globally – particularly in emerging regions with a limited experience and tradition of insolvency systems.

In leaving open the precise form of cooperation between courts, as well as between courts and insolvency practitioners, in cross-border matters, the MLCBI also provides for the very flexibility that is needed to adapt to novel and evolving restructuring tools and trends globally, including the use of meditation to support creditor negotiations and resolutions with a view to a restructuring involving minimal court intervention. Indeed, the express reference to the ‘appointment of a person or body to act at the direction of the court’ as a form of court-to-court cooperation in article 27(a) of the MLCBI may serve as a valuable underpinning in the future growth of cross-border mediation as an adjunct to more flexible and effective restructuring processes.

Of course, there are other international frameworks that adopt similar concepts to the MLCBI, notably the provisions of the European Insolvency Regulation (EIR)¹¹ and the European Insolvency Regulation (Recast) (EIR Recast).¹²  In some respects, those provisions can be seen to offer even greater clarity and certainty than the MLCBI, particularly in relation to the disapplication of the presumption that the debtor’s COMI is the place of its registered office where that registered office has been moved to another jurisdiction in the three month period prior to a request to open insolvency proceedings.¹³  This plays an important role in preventing ‘bad’ forum shopping undertaken by a debtor with a view to benefit from a ‘debtor-friendly’ insolvency process and defeat the legitimate expectations of creditors.¹⁴

Yet the importance of the simultaneous adoption of the MLCBI as at least a guaranteed ‘fallback’ framework has been laid bare in the repercussions following Brexit. Notably, while the United Kingdom had also implemented the MLCBI in domestic legislation when leaving the EU,¹⁵ in addition to previously being bound by the terms of the EIR and the EIR Recast, only four other EU members – Poland, Slovenia, Romania and Greece – had done the same. Since 31 December 2020, the EIR and the EIR Recast ceased to apply in the United Kingdom, meaning that while insolvency processes in EU States can continue to be recognised in the United Kingdom under the framework of the MLCBI, recognition of United Kingdom insolvency processes will now fall to be determined under the national laws (including court-developed general law) of each EU State where recognition in an EU State is required in a given case. 

Accordingly, while the EIR and the EIR Recast provide a useful cross-border recognition and cooperation framework within the EU, there is a need for a broader framework represented by the MLCBI as an essential foundation for recognition and cooperation on a global scale. 

Where to next?

A)    Further adoption and implementation of the MLCBI

As at the time of writing this article, the MLCBI had still only been adopted by a total of 50 States across 54 jurisdictions. 

Among those yet to adopt the MLCBI are the economic powerhouses of China and India, as well as Hong Kong, Malaysia, Thailand and Indonesia in the East Asia and Pacific region and – as noted above – most EU members including Germany, France, Italy, Austria, Belgium and Spain. 

This represents perhaps the primary challenge to achieving greater consistency and harmonisation in cross-border restructuring and insolvency processes. After all, an international framework is only ever as effective as its implementation. 

For those nations that have not adopted the MLCBI, there are in some cases bilateral treaties in place concerning recognition and cooperation that have been adopted instead. For example, on 14 May 2021, the Government of the Hong Kong Special Administrative Region (HKSAR) and the Supreme People’s Court (SPC) of the People’s Republic of China signed a joint Record of Meeting on the mutual recognition of and assistance concerning bankruptcy and insolvency proceedings between the courts of the Mainland and of the HKSAR. 

Among other things, the Record of Meeting foreshadows mutual recognition and cooperation between designated Intermediate People’s Courts in pilot areas in Mainland China and HKSAR courts, both in relation to liquidation and provisional liquidation proceedings in HKSAR, and bankruptcy liquidation, reorganisation and compromise proceedings in Mainland China. 

Nevertheless, the optimal framework remains the MLCBI because of the potential to, with its widespread adoption and implementation, achieve genuine multilateral uniformity and consistency. Ad hoc bilateral arrangements – whether at a government-to-government level or a court-to-court level – are not only difficult to negotiate, but also only necessarily deal with a limited demarcation of economic activity. With the proliferation of multinational global enterprises as part of a modern global economy, bilateral arrangements in many cases will not be suited to achieve the broader level of consistency and cooperation across multiple jurisdictions in a debtor’s cross-border insolvency proceedings. Even if a jurisdiction does negotiate multiple bilateral arrangements, then inherently the expansion of those arrangements adds to the very complexity and potential for inconsistency that the adoption and implementation of the MLCBI is designed to overcome. 

It is also possible for nations that have not adopted the MLCBI to instead rely on the statutory aid and auxiliary provisions referred to earlier in this article. A recent example of the use of those provisions occurred in the Halifax matter,¹⁶ which led to the historic joint sittings of the Federal Court of Australia and the High Court of New Zealand in December 2020 in relation to parallel insolvency processes involving an Australian parent entity and a New Zealand subsidiary.¹⁷ The insolvency representatives of those entities elected to apply under the respective aid and auxiliary provisions in the relevant Australian and New Zealand legislation, despite both Australia and New Zealand having adopted the MLCBI, on the basis that the MLCBI (as discussed in further detail below) is not specifically catered to the circumstances of distinct corporate group entities in different jurisdictions. 

While the end result – due to the flexibility and proactive, commercial approach demonstrated by the Australian and New Zealand courts – produced the desired cost savings and coordination efficiency for the benefit of creditors in both jurisdictions, the issue remains that cooperation under aid and auxiliary provisions lacks consistent guidelines and depends on the inherently wide discretionary powers of courts. There is a greater potential for interpretation differences and inconsistency under provisions of that kind, not only within jurisdictions but particularly across jurisdictions, compared to the MLCBI. 

Accordingly, there ought now to be a renewed focus on encouraging the wider adoption and implementation of the MLCBI. There are strong, continued efforts being pursued on that front across the globe by UNCITRAL, particularly in the activities of its Working Group V (Insolvency), including through technical assistance, capacity-building, promotional work and engagement across government, judiciary, academia and business. 

Similarly, INSOL International and the World Bank have used capacity-building initiatives and the activities of INSOL’s Legislative & Regulatory Group and Judicial Group to promote globally the benefit of the MLCBI as a matter of legal consistency as well as investment security and economic importance.

Indeed, reflecting the strong collaboration and partnerships between UNCITRAL, INSOL and the World Bank, the continued adoption and implementation and consistent interpretation and application of the MLCBI has featured as a regular topic in joint INSOL-World Bank Legislative & Regulatory Colloquia and other forums, as well as in joint INSOL-UNCITRAL Judicial Colloquia, and tripartite INSOL-World Bank-UNCITRAL Regional Roundtables in the decades following the original adoption of the MLCBI. 

Further, in its policy development capacity, the World Bank identifies in the revised April 2021 edition of its Principles for Effective Insolvency and Creditor/Debtor Regimes (ICR Principles) that the establishment of ‘a framework for cross-border insolvencies, with recognition of foreign proceedings’ is one of the key objectives and policy priorities of effective insolvency systems globally.¹⁸  The ICR Principles also recognise the importance of individual countries putting in place local legislation consistent with such a framework, incorporating ‘clear rules pertaining to jurisdiction, recognition of foreign judgments, cooperation among courts in different countries and choice of law’.¹⁹

B)    Consistency in the form of implementation and the interpretation of the MLCBI

The form of implementation is also important. Indeed, this is identified in UNCITRAL’s MLCBI Guide to Enactment, which states that ‘in order to achieve a satisfactory degree of harmonisation and certainty, it is recommended that States make as few changes as possible in incorporating the Model Law into their legal systems’.²⁰

Yet differences have emerged. For example, while most nations that have adopted and implemented the MLCBI have done so without a reciprocity requirement (so that adoption by the jurisdiction where main proceedings are opened is not a precondition to recognition and cooperation), that is not the case in other States, such as South Africa²¹ and Mexico.²²

The public policy exception in article 6 of the MLCBI also remains a vexed issue, reserving the ability for courts to refuse to recognise a foreign insolvency proceeding if it would be ‘manifestly contrary’ to the public policy of the State where recognition is sought. Yet in some implementing local laws, a wider basis for refusal is contemplated, such as in Canada²³ and Serbia,²⁴ where the reference to ‘manifestly’ has been omitted. 

Further, the manner in which the expression ‘public policy’ is interpreted is open to significant differences in approach, which continues to be problematic in cases decided under the MLCBI. How liberally the expression is applied has the potential to turn the modified universalism intended under the MLCBI into territorialism. 

Again, UNCITRAL continues its strong advocacy seeking to ensure consistency in the form of implementation and the interpretation of the MLCBI. Most recently, Working Group V intends to publish later in 2022 an updated Judicial Perspective on the MLCBI, commenting on the application and interpretation of the MLCBI by courts, and it also published a Digest of Case Law on the MLCBI in 2020, which includes the pivotal cases determined under each provision of the MLCBI since its adoption and draws attention to emerging judicial trends and views. With both of these initiatives, the intention is to promote uniformity in the application of the MLCBI according to common principles, interpretations and analytical processes in judicial decision-making. 

C)    Beyond the MLCBI: Pursuing supplemental cross-border frameworks 

Apart from the MLCBI, it will also be necessary to encourage the adoption and implementation of supporting cross-border restructuring and insolvency frameworks in the years ahead.

Enhanced cooperation protocols

One of the key focus areas ought to be the continued delineation and adoption of specific court-to-court cooperation protocols, setting out clear guidelines on matters such as the manner of communication, information sharing and joint hearings. Indeed, the importance of further judicial cooperation, coordination and consistency was recently identified as a policy priority by Working Group V at its 60th Session held in New York from 18 to 21 April 2022. 

As noted earlier, while the MLCBI contemplates court and insolvency practitioner cooperation in articles 25 to 27, the ultimate nature and scope of that cooperation is left for further prescription in specific protocols outside the MLCBI. Effective frameworks already in place include the ALI-III Global Principles,²⁵ the CoCo Guidelines,²⁶ the JudgeCo Principles and Guidelines²⁷ and the principles adopted by JIN.

JIN has made particularly good progress on these measures. As a network of insolvency judges from North America, South America, Europe, Asia, Australia and the Caribbean (intended to serve as a platform for sustained and continuous engagement to further cooperation and communication, best practices and judicial thought leadership), JIN issued a set of Guidelines at its inaugural conference in Singapore in October 2016.²⁸

The primary aim of the JIN Guidelines is to facilitate the preservation of enterprise value and the reduction of legal costs, and set out principles for communication, joint hearings and other means of coordination. The Guidelines have now been adopted by 16 courts globally²⁹ in just a five year period, and are now supplemented by specific Modalities³⁰ that deal with the mechanics for engaging in communication – including details concerning the time, method and language of communication, as well as consent and confidentiality and a role for a facilitator to act as the primary individual to initiate or receive communications on behalf of courts in different jurisdictions.

The recognition of insolvency-related judgments

Another key focus area relates to the recognition of insolvency-related judgments. While the MLCBI provides a framework for the recognition of, and cooperation regarding, restructuring and insolvency procedures, it does not of itself automatically facilitate the recognition of foreign judgments arising out of those procedures.

This has limited the achievement of modified universalism in practice, as reflected by the so-called ‘rule in Gibbs' ³¹ as well as the decision of the United Kingdom Supreme Court in Rubin v Eurofinance (Rubin).³²

The rule in Gibbs dates back to the 19th century, and provides that a debt governed by English law cannot be discharged or altered by a foreign law (including a foreign insolvency proceeding). This means that, while an English court may recognise a foreign insolvency process and impose an interim enforcement moratorium while a foreign restructuring plan is negotiated,³³ a final restructuring plan endorsed under the framework of a foreign insolvency process is not effective to extinguish or modify debts of creditors whose contracts with the insolvent debtor are covered by English law. 

Although the rule has been described as a ‘glaring anomaly’ given that under English law an English scheme of arrangement can discharge a foreign debt, it continues to be upheld by English courts. For example, in the recent decision of the English High Court in Bakhshiyeva v Sberbank,³⁴ OJSC International Bank of Azerbaijan (IBA) – the largest commercial bank in Azerbaijan – entered a restructuring proceeding under Azeri law. The foreign representative obtained recognition for the proceeding in the United Kingdom as a foreign main proceeding, and IBA and its creditors subsequently agreed to a restructuring plan purporting to result in the discharge of IBA’s present liabilities. However, the English High Court upheld the ability of creditors with contracts governed by English law to maintain the efficacy of their debts and to proceed to obtain judgment and enforce those judgments against the assets of IBA in the United Kingdom. The High Court declined to order a permanent enforcement moratorium, argued by the foreign representative to be a power within the procedural cross-border recognition framework of the Cross Border Insolvency Regulations (applying the MLCBI in the United Kingdom) that would not technically extinguish any debts governed by English law. It was held that doing so would in practical terms be equivalent to discharging those debts and that the rule in Gibbs prevented a court from permitting practical abrogation by procedural means.

Equally undermining the basis for modified universalism is the decision in Rubin. In that case, the United Kingdom Supreme Court refused to enforce an avoidance judgment concerning fraudulent conveyances entered by the United States Bankruptcy Court (the main insolvency forum). The Supreme Court held that the MLCBI is limited to the procedural aspects of cross-border insolvency and does not govern choice of law rules to enable the enforcement of insolvency-related judgments. According to the Court, this leaves in place default ordinary private international law rules preventing the enforcement of in personam judgments against defendants not present in the foreign country where the judgment is entered and who do not submit to the jurisdiction of the court entering the judgment.

The approach of the United Kingdom courts on these issues contrasts to the approach adopted in other jurisdictions. For example, United States courts have taken the position that the MLCBI does provide a basis for the recognition and enforcement of insolvency-related judgments under the discretionary relief provisions in article 21.³⁵

The inconsistent approaches to the interpretation of the MLCBI concerning insolvency-related judgments, and the resulting impact on achieving the consistent, predictable cross-border insolvency framework intended by a policy of modified universalism, led UNCITRAL to adopt the MLIRJ in July 2018 as a framework for uniform recognition and enforcement of judgments arising from insolvency proceedings.

According to UNCITRAL, the MLIRJ is intended to overcome the ‘uncertainty concerning the ability of some courts, in the context of recognition proceedings under the MLCBI, to recognise and enforce judgments given in the course of foreign insolvency proceedings … on the basis that neither article 7 nor 21 of the MLCBI explicitly provide the necessary authority’.³⁶

The MLIRJ is an important contribution to the pursuit of uniformity, consistency and predictability in cross-border restructuring and insolvency outcomes, and particularly the ability to negotiate and implement an effective multi-jurisdictional restructuring plan binding on all creditors without the risk of individual enforcement action removing critical assets necessary to a successful corporate or business rescue and ongoing trade in the interests of creditors, employees and other stakeholders. 

However, as with the MLCBI, the MLIRJ has no legal effect until it is implemented by States domestically. This is expected to take many years (with no State having yet given domestic effect to the MLIRJ). 

Given their strong interrelationship as part of a coordinated, consolidated approach to cross-border restructuring and insolvency principles and standards, efforts to encourage further implementation of the MLCBI in coming years ought to be pursued in conjunction with encouraging and assisting States to adopt and implement the MLIRJ domestically.

Corporate group restructuring

Additionally, with ongoing globalisation and digital transformation, we will continue to see the conduct of business in multiple jurisdictions under complex corporate group arrangements, with parent and subsidiary companies located in different jurisdictions across the world. 

With that economic and structural dynamic, and the resultant potential for simultaneous insolvency filings in different jurisdictions for each separate group entity in the event of financial distress, a clear framework for the coordination and recognition of centralised corporate group insolvency and restructuring proceedings involving group entities is necessary. The absence of such a framework will increase administration costs and the potential for a territorialist approach from courts, conflicting judgments and fragmented individual country responses to corporate group financial distress – depleting enterprise value, creditor returns and the potential for a successful corporate or business restructuring.

The MLCBI is not specifically tailored to deal with group restructurings, and pending steps to negotiate a supporting international group-specific cross-border restructuring and insolvency recognition and cooperation framework, courts have pursued creative outcomes to facilitate synthetic group proceedings. The leading example is Re Collins & Aikman Europe SA,³⁷ where the English High Court made orders allowing the joint English administrators of multiple entities forming a corporate group across jurisdictions to implement guarantees they made to foreign creditors to pay their claims from realised foreign assets according to the priority laws applying in each of those foreign jurisdictions.

However, there is a clear benefit in having in place a formal framework capable of adoption and implementation, and consistent application, by courts as a matter of course in a corporate group distress scenario, rather than relying on broad judicial discretion that is apt to differences in interpretation and application in different legal systems.

To that end, another UNCITRAL instrument, the MLEGI, was adopted by UNCITRAL in July 2019. It is intended to operate in a complementary manner with the MLCBI, albeit ‘designed to address specific needs of insolvency proceedings affecting multiple enterprise group members’ as distinct from the MLCBI ‘which concerns itself with insolvency proceedings concerning a single debtor’,³⁸ as well as Part 3 of the UNCITRAL Legislative Guide on Insolvency Law. The latter is focused exclusively on the treatment of enterprise groups in insolvency, 

As with the MLIRJ, the MLEGI has not yet been implemented by any State in domestic legislation. On this anniversary of the adoption of the MLCBI, the conversation on putting in place a clear and consistent cross-border framework to enable the recognition of, and cooperation regarding, corporate group restructuring and insolvency processes, must continue to be pursued with vigour. At this important time in the global economy, when the appetite for enduring insolvency and restructuring law reform is perhaps greater than it has ever been, the adoption and implementation of the MLEGI ought to be pursued as a policy priority simultaneously with efforts to encourage further uptake of the MLCBI and the adoption and implementation of the MLIRJ.

Applicable law

Another important priority will be providing greater clarity on applicable law in an insolvency proceeding. Currently, different approaches have been taken in various jurisdictions on the extent to which the law of the State where the insolvency proceedings are opened (lex fori concursus) applies to all aspects of the insolvency proceedings. 

The expectation is clear in the EIR Recast that the lex fori concursus ought to apply to all aspects of the insolvency proceedings – subject to limited exceptions such as set-off, avoidance and the treatment of immovable property – but in insolvency matters extending to debtors and assets outside the EU, the position is less clear. 

This results in fragmentation, the greater incidence of disputes and a lack of predictability in cross-border restructuring and insolvency matters – the very opposite of what the policy goal of modified universalism is intended to achieve. The consequential adverse impact on finance and investment – due to uncertainty for creditors and investors in being able to assess the impact that financial distress and insolvency will have on their rights and commercial relationships – undermines the goal of governments globally now to be pursuing stability and long-term growth in capital markets and the economy. 

Working Group V is currently developing draft legislative provisions intended to: (i) reinforce the application of the lex fori concursus to all aspects of insolvency proceedings, subject only to limited and clearly defined exceptions; (ii) clarify the precise meaning and scope of the lex fori concursus and the relevant exceptions; and (iii) clarify the meaning and scope of ‘insolvency proceedings’ as a threshold matter invoking applicable law considerations in the first place. 

In whatever form the draft legislative provisions take when finalised, their uptake by States will form a crucial part of the cross-border restructuring and insolvency framework going forward.

Takeaways

The MLCBI has played an indispensable role in developing a clear, consistent and predictable framework for mutual recognition and cooperation in cross border restructuring and insolvency matters and, in doing so, has contributed to better creditor returns, a greater prospect of corporate and business rescue, and stronger financial systems and economies across the world. 

However, on this important 25th anniversary of the adoption of the Model Law, it is important to now broaden the cross-border insolvency reform and implementation conversation to look for additional ways to enhance those outcomes. 

It is suggested that, in addition to continued efforts to encourage the more widespread adoption, domestic implementation and consistent interpretation of the MLCBI, global attention must now also focus on the adoption and implementation of other important international frameworks – particularly the means for judicial coordination and communication set out in the ALI-III Global Principles, the CoCo Guidelines, the JudgeCo Principles and Guidelines and the JIN Guidelines and Modalities, as well as the important clarifying principles on the enforcement of insolvency-related judgments and the complex circumstances of corporate group restructurings under the MLIRJ and the MLEGI. The ongoing efforts of Working Group V to develop a legislative model for applicable law in an insolvency proceeding will also serve as an important supplement to these frameworks. 

INSOL International can play a leading role in this process, working in close partnership with UNCITRAL and the World Bank, as well as other global organisations such as the III. 

As the current President of INSOL International, I know that these are among the top focus areas in INSOL’s continued emphasis on law reform and capacity building activities, and the ongoing and impactful work of the Legislative & Regulatory Group and the Judicial Group. 

With John Martin also serving as the current President of III, this is also a unique opportunity for the global network at NRF to engage closely in the process to advance a robust and effective global restructuring and insolvency recognition and cooperation framework – leveraging powerful expertise and knowledge across the world to achieve outcomes that will ultimately drive not only better insolvency systems, but also stronger regional and global investment, economic growth and financial stability at such an important time in human history.

(*) This article was published on the website of Norton Rose Fulbright on 30 May 2022. It can be found here.

Footnotes

1 [2006] UKPC 26 (Cambridge Gas).

2 Cambridge Gas at [22].

3 For example, under section 581(2)(a) of the Australian Corporations Act 2001 (Cth), in all external administration matters, the court must act in aid of, and be auxiliary to, the courts of prescribed countries that have jurisdiction in external administration matters.  Courts also have the discretion under section 581(2)(b) to act in aid of, and be auxiliary to, the courts of other countries that have jurisdiction in external administration matters (i.e. in countries that are not prescribed).

4 The broad nature of the discretion in this regard is discussed in the Australian case of Indian Farmers Fertiliser Cooperative Ltd v Legend International Holdings Inc (2016) 52 VR 1. 

5 UNCITRAL, ‘Guide to Enactment and Interpretation of the UNCITRAL Model Law on Cross-Border Insolvency’ at [5].
6 MLCBI, article 15.

7 MLCBI, articles 2 and 17.

8 MLCBI, article 20.

9 MLCBI, article 19. 

10 MLCBI, articles 25 to 27.

11 Council Regulation (EC) No 1346/2000 of 29 May 2000 on insolvency proceedings.

12 Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (recast). 

13 EIR Recast, article 3(1). 

14 This is in contrast to ‘good’ forum shopping undertaken to obtain the benefit of more flexible restructuring options such as an English scheme of arrangement or restructuring plan not available in the debtor’s home jurisdiction in the interests of achieving a maximum return for all creditors. 

15 See the Cross Border Insolvency Regulations 2006 (UK). 

16 In this matter, the Halifax group provided broking and securities trading services via online trading platforms, including through an Australian incorporated parent and a New Zealand incorporated subsidiary which underwent parallel administration and subsequently liquidation processes in Australia and New Zealand, each with the same insolvency practitioners acting as administrators and then liquidators. Following the issue of a letter of request by the Federal Court of Australia, and accession to that request by the New Zealand High Court, joint hearings were conducted to determine the pooling of commingled funds in each jurisdiction. 

17 Courts then delivered contemporaneous judgments and made consistent orders on 19 May 2021. 

18 ICR Principles, Principle C1.

19 ICR Principles, Principle C15.

20 UNCITRAL, ‘Guide to Enactment and Interpretation of the UNCITRAL Model Law on Cross-Border Insolvency’ at [20]. 

21 The MLCBI was implemented in South Africa under the Cross Border Insolvency Act (42 of 2000), but the legislation applies only to ‘designated countries’ determined by the Department of Justice.  To date, there has not been any designation (which, as a matter of practice, means that the MLCBI is not operational in substance in South Africa).

22 See article 280 of the Law on Commercial Insolvency (2000). 

23 See section 61(2) of the Companies’ Creditors Arrangement Act (RSC 1985, c. C-36), which states that ‘nothing in this Part’ (outlining the scope for courts to recognise and cooperate in relation to a foreign insolvency process) ‘prevents the court from refusing to do something that would be contrary to public policy’. 

24 See article 179 of the Bankruptcy Law of Serbia (104/2009), which states: ‘The appropriate court may refuse to take an action concerning a cross-border bankruptcy case if the action would be contrary to the public policy of the Republic of Serbia’. 

25 ALI-III Global Principles for Cooperation in International Insolvency Cases (2017). 

26 The European Communication and Cooperation Guidelines for Cross-Border Insolvency (2007).

27 The EU Cross-Border Insolvency Court-to-Court Cooperation Principles and Guidelines (2014).

28 JIN Guidelines for Communication and Cooperation between Courts in Cross-Border Insolvency Matters (2016). 

29 Including United States Bankruptcy Courts in Delaware, New York, Florida and Texas, the Supreme Court of Singapore, the Chancery Division of England & Wales, the Federal Court of Australia, the Supreme Court of New South Wales, and relevant bankruptcy courts in Seoul, Brazil and the Netherlands. 

30 JIN Modalities of Court-to-Court Communication (2019). 

31 Named after the decision in Antony Gibbs & Sons v La Societe Industrielle et Commerciale des Metaux (1890) LR 25 QBD 399. 

32 [2013] 1 AC 236.

33 The imposition of a wide-ranging enforcement moratorium is one key effect of recognition being granted under the United Kingdom Cross Border Insolvency Regulations 2006.

34 [2018] EWCH 59 (Ch). 

35 In re Metcalfe & Mansfield Alternative Investments, 421 BR 685 (Bankr SDNY 2010). 

36 UNCITRAL, ‘Guide to Enactment of the UNCITRAL Model Law on Recognition and Enforcement of Insolvency-Related Judgments’ at [2]. 

37 [2006] EWHC 1343.

38 UNCITRAL, ‘Guide to Enactment of the UNCITRAL Model Law on Enterprise Group Insolvency’ at [3].