UNCITRAL Legislative Guide on Insolvency Law for Micro- and Small Enterprises (2021)

Purpose

The UNCITRAL Legislative Guide on Insolvency Law for Micro- and Small Enterprises is comprised of the UNCITRAL Legislative Recommendations on Insolvency of Micro- and Small Enterprises, adopted by the United Nations Commission on International Trade Law at its fifty-fourth session in 2021, and the related commentary, finalized by UNCITRAL Working Group V (Insolvency Law) at its fifty-ninth session (Vienna, 13-17 December 2021).

The Legislative Guide is designed to take the unique characteristics of micro- and small enterprises (MSEs) into account and to respond to the specific needs and circumstances of their financial distress. In particular, MSEs often have intermingled business and personal debts and a centralized governance model in which ownership, control and management overlap.  Unlike larger enterprises, MSEs are often unsophisticated in financial, business management, legal and insolvency matters.  In addition, they may have strong concerns over stigmatization arising from insolvency, and this might affect their behaviour in the period approaching insolvency. They may also face more obstacles in resolving financial difficulties, particularly if their creditors are disengaged and disinterested to assist, which is often the case because MSE creditors consider that the costs of their efforts may outweigh the benefits.  

As part of UNCITRAL texts series on micro, small and medium-sized enterprises (MSMEs), the Legislative Guide complements other UNCITRAL texts addressing the legal obstacles faced by MSMEs throughout their life cycle, such as the UNCITRAL Legislative Guide on Key Principles of a Business Registry (2019) and the UNCITRAL Legislative Guide on Limited Liability Enterprises (2021).

Relevance 

MSMEs constitute the majority of businesses in economies around the world, contributing to job creation and preservation, the supply chain development, entrepreneurship, innovation and the economic and social welfare of society. Being in the micro- and small-sized part of the spectrum, MSEs tend to have a relatively undiversified creditor, supply and client base and heavily depend on payments from their clients. As a result, they often face cash flow problems and higher risks of default following from the loss of a significant business partner or from late payments by their clients. MSEs also face scarcity in working capital, higher interest rates and larger collateral requirements, which make raising finance, especially in situations of financial distress, difficult if not impossible. As a consequence, they may be more prone to business failure than larger enterprises. MSEs in financial distress may themselves be the clients of other MSEs that may share the same characteristics, with the consequence that the business failure of one MSE may cause business failures in the MSE supply chain.

Standard business insolvency processes may be unavailable to MSEs. Where they are available, they are designed primarily for resolution of financial difficulties of larger enterprises, they may be costly, complex, lengthy and procedurally rigid and thus prohibitive or unsuitable for MSEs. Burdened by unresolved financial difficulties and old debt, MSEs may be discouraged from taking new risks, may become trapped in a cycle of debt or may be driven to the informal sector of the economy. 

Key provisions

The Legislative Guide is intended to supplement the advice given in other recommendations of the UNCITRAL Legislative Guide on Insolvency Law with a specific focus on how insolvency and preventing insolvency should be dealt with where MSEs are involved. Links between the Legislative Recommendations on Insolvency of Micro- and Small Enterprises and other recommendations of the UNCITRAL Legislative Guide on Insolvency Law are provided through cross-references and the tables of concordance annexed to the commentary. Where the Legislative Recommendations diverge from other recommendations of the UNCITRAL Legislative Guide on Insolvency Law, this is expressly made clear in the commentary.