UK to Adopt UNCITRAL Model Law on Enterprise Group Insolvency
By Eugenio Vaccari (Royal Holloway)
On 7 July 2022, the UK Government published a consultation on changing UK law to implement two model laws in the field of insolvency, which have been adopted by the United Nations Commission on International Trade Law (“UNCITRAL”). The model laws further develop the international framework for the management of cross-border insolvencies, which supports the efficient and predictable resolution of financial failure. These are:
- The Model Law on Recognition and Enforcement of Insolvency-Related Judgments (“MLIJ”), which deals with cross-border recognition of judgments that are associated with insolvency proceedings;
- The Model Law on Enterprise Group Insolvency (“MLEG”), which provides tools to manage and coordinate insolvencies within corporate groups, while respecting that each company within the group remains a separate legal entity.
Just one year after the consultation was launched, the Insolvency Service announced that the UK Government intends to legislate to implement the MLEG “at the earliest opportunity”. However, the UK Government acknowledged the issues associated with the implementation of the MLIJ (for the challenging interaction with long-standing UK case law in the field)[1] and decided to take more time to evaluate this issue.
What the UNCITRAL Model Law on Enterprise Group Insolvency is About
The MLEG focuses on insolvency proceedings relating to multiple debtors that are members of the same enterprise group. It is designed to equip countries with modern legislation addressing the domestic and cross-border insolvency of enterprise groups. The MLEG complements the UNCITRAL Model Law on Cross-Border Insolvency (MLCBI),[2] which only deals with the recognition of foreign insolvency proceedings affecting single companies.
The MLEG’s main goal is to promote the use of a transparent and predictable regime for the companies in the group, as well as to implement adequate and coordinated approaches to the insolvency of group members. Under the MLEG, the courts of adopting countries are required to cooperate with other courts and insolvency officeholders in cross-border cases involving insolvent enterprise groups.
While UK courts have generally been supportive and have effected cross-border protocols for the implementation of corporate group insolvency procedures, the area lacks specific regulation. Up until now, solutions have been bespoke, largely through ad hoc arrangements designed to suit each individual case. The MLEG provides tools to manage and co-ordinate insolvencies within corporate groups, while respecting that each company within the group remains a separate legal entity. In other words, its provisions facilitate the co-operation, communication and efficient administration of cross-border insolvencies involving groups of companies. The goals of the MLEG are ambitious: to maximise the return to creditors on the one hand, whilst better protecting the interest of the creditors involved in the group procedures on the other.
The MLEG aims at providing for procedural coordination rather than substantive consolidation of the assets and claims against the group. This has certainly been a wise choice, as substantive consolidation of assets and liabilities is rarely achieved and frequently criticised from a doctrinal viewpoint.
More in details, the MLEG includes provisions on coordination and cooperation between courts, insolvency representatives and a group representative (where appointed). It also advocates the use of a single insolvency proceeding for the whole group commenced at the location where at least one group member (preferably, the main debtor in the group) has the centre of its main interests (COMI). These proceedings are called “planning proceedings”.
Once commenced, the representative of the planning proceeding (the “group representative”) may seek relief from the UK court to protect the value of an enterprise group member. The MLEG also provides for the voluntary participation of multiple group members in the single insolvency proceeding for the purposes of coordinating a group insolvency solution for relevant enterprise group members and access to foreign courts for enterprise group members and representatives. The group representative may also coordinate the development of a group insolvency solution. Finally, the MLEG features a mechanism to treat foreign creditor claims in the planning proceeding according to the law that would have applied to them had non-main proceedings commenced for the relevant group company. These “synthetic non-main proceedings” avoid the expense and complication of separate proceedings and would, for example, permit an English court to apply foreign law.
Overall, the cross-border recognition of a planning proceeding will facilitate the development of the group insolvency solution, as well as supporting measures and the recognition of a group insolvency solution.
What Has Been Announced
The UK Government announced that they are willing to implement the MLEG “at the earliest opportunity” and “with minimal changes”. The UK Government suggested that no modifications should be made to the original text, which was described as “sufficiently clear”. As a result, it rejected calls to expand the MLEG’s scope to include restructuring proceedings.
With reference to the rights of minority and dissenting creditors, the UK Government considered that it would be helpful to permit the recognition and enforcement of a foreign judgement, as that might avoid the need for separate applications in some cases. However, the UK Government believes that the recognition of judgments should only be available in the UK if the related issues can be resolved. As a result, local creditors’ interests are protected when granting relief and recognition of foreign judgments.
The announcement will have the advantage of persuading the parties (especially those based in the UK) to follow the formal framework for cooperation promoted by the MLEG. Eventually, when the MLEG will be adopted by multiple jurisdictions, this framework will become the preferred mechanisms for dealing with cross-border group insolvencies.
While to date no jurisdiction has implemented the MLEG in their national laws, it was observed that the primary value of the MLEG is that it simply evolves an internationally recognised practice for mutual cooperation between countries on cross-border issues.
Concluding Remarks
The increasing globalization of economic activity has led to significant growth in the number of enterprise groups active in international trade and commerce. The UK may be the first jurisdiction to implement the Group Model Law into its national law, taking the lead as an early adopter. This is extremely welcome news, considering the increasing number of group insolvencies with cross-border elements. Such decision signals the UK’s commitment to international cooperation and may further promote the role of the UK as a key global insolvency and restructuring hub, despite the impact of the UK’s withdrawal from the European Union.
In the short term, the practical impact of the Group Model Law will be limited, until it is adopted in multiple jurisdictions. The reciprocity requirement means that the MLEG will achieve its purpose only if it has been enacted in the other jurisdictions where affected companies are domiciled. Additionally, the UK Government decision not to expand the scope of the MLEG to include restructuring proceedings means that such rules will only apply to complex group insolvencies.
However, overall, this is a positive step in the right direction to create an international framework of cooperation. The UK Government rightly observed that the UK is a well-regarded jurisdiction in insolvency matters. As a result, the country is well placed to take the lead in implementing the MLEG and so encourage such a network to develop.
* This article was first published in INSOL’s I-Read November 2023 Edition.
[1] This is because of the long-standing legacy of the judgment in Antony Gibbs & Sons v La Société Industrielle et Commerciale des Métaux (1890) 25 QBD 399 (Court of Appeal), which established the principle that only the governing law of a contract may validly discharge or amend it, unless otherwise agreed by the parties in the contract.
[2] The UK implemented the MLCBI through the Cross-Border Insolvency Regulations 2006.