UNCITRAL Legislative Recommendations on Insolvency of Micro- and Small Enterprises (2021)
Purpose
The Legislative Recommendations on Insolvency of Micro- and Small Enterprises, prepared by UNCITRAL Working Group V (Insolvency Law) and adopted by UNCITRAL at its fifty-fourth session in 2021, are 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.
Why addressing MSEs’ specific needs and circumstances in financial distress is important
Micro, small and medium-sized enterprises (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.
How the Legislative Recommendations address MSEs’ specific needs and circumstances in financial distress
The Legislative Recommendations on Insolvency of Micro- and Small Enterprises recognize unique characteristics of MSEs and their specific needs and circumstances in financial distress, in particular that MSEs would need faster, simpler, accessible and affordable procedures as well as guidance and assistance on how to use those procedures. Such guidance and assistance should be provided before the commencement of insolvency proceedings and throughout the proceedings. The Legislative Recommendations contain provisions addressing those and other measures, which together should encourage MSEs to address their financial difficulties at an early stage. The objective is to expeditiously liquidate and discharge non-viable MSEs from debts, while assisting viable MSEs to reach a workable solution with their creditors for a debt restructuring and business and management reorganization. Appropriate protection of creditors, including employees, and safeguards against abuse are built throughout the text, including in the form of supervision by the competent authority.
The Legislative Recommendations as part five of the UNCITRAL Legislative Guide on Insolvency Law and as part of UNCITRAL texts series on micro, small and medium-sized enterprises (MSMEs)
Upon adoption of the Legislative Recommendations, the Commission decided to publish them, together with the accompanying commentary, as part five of the UNCITRAL Legislative Guide on Insolvency Law and as part of UNCITRAL texts series on micro, small and medium-sized enterprises (MSMEs). This is because of the relevance of the text to both areas of work by UNCITRAL: insolvency law and work on reducing the legal obstacles faced by MSMEs throughout their life cycle, in particular in developing economies.
As part of UNCITRAL texts series on micro, small and medium-sized enterprises (MSMEs), the text contributes to 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 Legislative Guide on Limited Liability Enterprises (2021).
As part five of the UNCITRAL Legislative Guide on Insolvency Law, the Legislative Recommendations are 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.
For the table of concordance between the Legislative Recommendations on Insolvency of Micro- and Small Enterprises and other recommendations of the UNCITRAL Legislative Guide on Insolvency Law, see the online table.