The summer of 2018 has not only led to record-breaking temperatures in Europe, but also to heated work at UNCITRAL, the UN legal body specialized in the field of international trade law. At its 51st session (25 June -13 July 2018), UNCITRAL adopted two sets of rules aimed at improving efficiency in the area of international dispute resolution. One of them relates to international commercial mediation and international settlement agreements resulting from it. Another covers issues arising in cross-border insolvency cases, namely insolvency-related judgments, their recognition and enforcement (Model Law on Insolvency-related Judgments, MLJ). This blog will discuss the latter, touching upon the original Model Law on Cross-Border Insolvency (1997) (MLCBI) and why it was no longer sufficient, the key provisions of the MLJ and some initial thoughts on this new instrument.
Model law in the area of international insolvency: the beginning
The MLCBI was adopted by UNCITRAL in 1997, as a response to the growing demand in a predictable legal framework for resolving complex cross-border insolvencies. Prior to the MLCBI, such resolution frequently fell back either on ad-hoc court-to-court arrangements (e.g. protocols) or regional instruments (e.g. Bustamante Code), which remained few and relatively inefficient. In this respect the MLCBI presented a bold innovation, particularly in light of drastically different national insolvency laws and a generally territorialist (read protectionist) stance on foreign insolvencies. Despite initial scepticism, the MLCBI was rather successful, with 44 jurisdictions passing legislation on its basis, the most recent examples include Israel (2018) and Singapore (2017). Notable absentees are China, Russia, Brazil and India (currently considering the adoption).
One should note that the aspirations of the MLCBI were reserved, as it did not introduce a unification of substantive insolvency rules. Instead it focused on four elements identified as key to the conduct of cross-border insolvency cases: access, recognition, relief (assistance) and cooperation. But even in these four areas the MLCBI, being a non-binding recommendation, allowed incorporating states to alter the original text. The most notable divergence stemming from such flexibility has been the reciprocity requirement that a number of states decided to impose (e.g. South Africa, Mexico, BVI). More importantly for the current discussion is the fact that, whereas the MLCBI clearly covered judgments opening insolvency proceedings, recognition and enforcement of judgments arising in the course of or closely connected to insolvency proceedings, remained less certain. For instance, while the US courts relied on the MLCBI (Chapter 15) to enforce foreign claims resulting from transaction avoidance, the UK approach turned out to be the direct opposite (see Rubin v. Eurofinance). Since the MLCBI did not provide the necessary authority on this matter, UNCITRAL decided in 2014 to develop a new model law specifically addressing recognition and enforcement of insolvency-related judgments. This work resulted in the Model Law on Insolvency-related Judgments, which plays a gap filling and complementing role to the MLCBI, but at the same time is capable of being adopted on a stand-alone basis.
Model Law on Insolvency-related Judgments (2018)
The adoption of the MLJ is undoubtedly a step in the right direction. It has the potential of making cross-border insolvencies more predictable, complete and efficient, maximizing value of assets and promoting other goals of international insolvency law. It does so by providing a framework for recognition and enforcement of insolvency-related judgments – judgments ‘arising as a consequence of or materially associated with an insolvency proceeding, whether or not that insolvency proceeding has closed.’ The Guide to Enactment of the MLJ offers a non-exhaustive list of judgments covered by the MLJ, such as:
- A judgment dealing with constitution and disposal of assets in the insolvency estate (estate-related judgments);
- A judgment on transaction avoidance (preferential and undervalue avoidance judgments);
- A judgment on insolvency-related director’s liability (director liability judgments);
- A judgment confirming or varying a plan of reorganization or liquidation, or approving a voluntary or out-of-court restructuring agreement (restructuring approval judgments);
- A judgment granting a discharge of the debtor or of the debt (discharge judgments).
A decision commencing insolvency proceedings does not fall in the category of insolvency-related judgments and is subject to a recognition regime under the MLCBI.
The purpose of the MLJ is to establish clear and predictable criteria for recognition and enforcement of insolvency-related judgments. The Guide to Enactment suggests a useful ‘step plan’ in the recognition process. A judgment should be recognized if (1) it meets the definition of an ‘insolvency-related judgment’, (2) it is effective and enforceable in the originating state, (3) it is sought by a competent person (e.g. insolvency practitioner) from an authorized court or authority in the enacting state, or the question of recognition arises by way of defence, (4) documents or evidence supporting the application (e.g. certified copy of the judgment) have been provided, (5) recognition is not contrary to public policy and (6) the judgment is not subject to any of the grounds for refusal.
Let’s assume that all the requirements for recognition have been met, what are the effects? In this respect, the MLJ (unlike the European Insolvency Regulation (recast), see Article 32) gives a choice to the enacting state – it can choose between giving the judgment the same effect as in the originating state (exported/extended model) or the same effect as it would have had if it had been issued in the receiving state (equivalence model). The MLJ also clarifies that when the relief requested is not available or is not known in the receiving state, the court should provide relief that has equivalent effects and give effect to the judgment to the extent permissible under its national law. This solution is very practical and ensures that the successful party receives meaningful relief.
Limitations of the new Model Law
Increased flexibility. While the MLJ signifies a new chapter in the development of the cross-border insolvency regulatory regime, it is a child of (political) compromise. The flexibility inherent in the MLJ allows states to make various modifications to the uniform text before they would be ready to enact it as a national law. On the one hand, flexibility ensures the widest possible adoption of the MLJ. On the other hand, as the experience of the MLCBI has shown, it may lead to discrepancies in the interpretation and application. For example, the MLJ includes an optional provision that permits recognition of an insolvency-related judgment to be refused when the judgment originates from a state whose insolvency proceedings are not susceptible to recognition under the MLCBI, e.g. because the originating state is neither the location of COMI nor of the debtor’s establishment (current US approach, see In re Creative Finance Ltd.). Thus, the same judgment may be capable of recognition in some states, but not in others.
Refusal of recognition. Compared to the MLCBI and the European Insolvency Regulation (recast), the MLJ contains an extensive listing of grounds for non-recognition. Apart from ‘traditional’ public policy exceptions, under the MLJ, recognition may be refused, inter alia, if (1) the defendant in the proceedings giving rise to the insolvency-related judgment was not properly notified of the proceedings, (2) there is a conflict between the judgment for which recognition and enforcement is sought and another judgment given in a dispute between the same parties, (3) the judgment interferes with insolvency proceedings or otherwise implicates (infringes) the interests of creditors and other stakeholders, (4) the basis of jurisdiction of the originating court is disputable (‘inadequate jurisdiction’). Without providing an in-depth analysis of these refusal grounds, it is clear that the grounds for non-recognition are very broad, all-encompassing and potentially unpredictable in their application. In view of this, one might reasonably question the desired efficiency of the new provisions.
Scope of application. The MLJ justifiably adopts a broad definition of what constitutes an insolvency-related judgment, covering ‘first day orders’ and post-closing decisions. At the same time, it explicitly excludes interim measures of protection. Due to the fact that the MLJ does not define ‘interim measures’ and given that legal systems differ on how those measures should be characterized, a situation of extreme uncertainty is created. For instance, a stay (moratorium) on enforcement, provisionally adopted by the originating court, may face difficulties in extending to jurisdictions equipped with the MLJ, simply because of its ‘interim’ or temporary nature. Another limitation of the MLJ comes from the fact that it only applies when there is a court-supervised collective insolvency proceeding. This requirement is arguably met whenever a voluntary or out-of-court restructuring agreement is ultimately referred to the court for approval in formal proceedings. Without such involvement by the court, recognition of a purely out-of-court work-out arrangement under the MLJ will be unavailable.
I welcome the new UNCITRAL model law, which should provide guidance in complex cross-border insolvency scenarios, whether of a liquidation or restructuring nature. Writing on the original Model Law in 1999, Professor Ian Fletcher insightfully noted that the “proof of the Model Law will be in the enactment.” This statement is no less relevant now, as applied to the Model Law on Insolvency-related Judgments.
With special thanks to Bob Wessels for reading and commenting on the draft version of the blog.