UNCITRAL Legislative Guide on Insolvency Law
Date of adoption: Parts one and two, 25 June 2004; part three, 1 July 2010; part four, 18 July 2013, July 2019 (2nd. ed.); part five, 2021.
Purpose
The Legislative Guide provides a comprehensive statement of the key objectives and principles that should be reflected in a State's insolvency laws. It is intended to inform and assist insolvency law reform around the world, providing a reference tool for national authorities and legislative bodies when preparing new laws and regulations or reviewing the adequacy of existing laws and regulations. The advice provided aims at achieving a balance between the need to address a debtor's financial difficulty as quickly and efficiently as possible; the interests of the various parties directly concerned with that financial difficulty, principally creditors and other stakeholders in the debtor's business; and public policy concerns, such as employment and taxation. The Legislative Guide assists the reader to evaluate the different approaches and solutions available and to choose the one most suitable to the local context.
Relevance to international trade
It is increasingly recognized that strong and effective insolvency regimes are important for all States as a means of preventing or limiting financial crises and facilitating rapid and orderly workouts from excessive indebtedness. Such regimes can facilitate the orderly reallocation of economic resources from businesses that are not viable to more efficient and profitable activities; provide incentives that not only encourage entrepreneurs to undertake investment, but also encourage managers of failing businesses to take early steps to address that failure and preserve employment; reduce the costs of business; and increase the availability of credit. Comparative analysis of the effectiveness of insolvency systems has become both common and essential for lending purposes, affecting States at all levels of economic development.
Much of the legislation relating to corporations and particularly to their treatment in insolvency deals with the single corporate entity, notwithstanding that the business of corporations is increasingly being conducted, both nationally and internationally, through enterprise groups - groups of corporations, sometimes very large, that are interconnected by various forms of ownership and control. These groups, found extensively in both emerging and developed markets, are a common vehicle for conducting international trade and finance. When some or all of the constituent parts of such groups become insolvent, there are currently very few domestic law regimes and no international or regional legal regimes that can effectively coordinate the conduct of the resulting insolvency proceedings, often involving multiple jurisdictions.
Key provisions
The Legislative Guide is divided into five parts.
Part one discusses the key objectives of an insolvency law, structural issues such as the relationship between insolvency law and other law, the types of mechanisms available for resolving a debtor's financial difficulties and the institutional framework required to support an effective insolvency regime.
Part two deals with core features of an effective insolvency law, following as closely as possible the various stages of an insolvency proceeding from their commencement to discharge of the debtor and closure of the proceedings. Key elements are identified as including: standardized commencement criteria; a stay to protect the assets of the insolvency estate that includes actions by secured creditors; post-commencement finance; participation of creditors; provision for expedited reorganization proceedings; simplified requirements for submission and verification of claims; conversion of reorganization to liquidation when reorganization fails; and clear rules for discharge of the debtor and closure of insolvency proceedings.
Part three addresses the treatment of enterprise groups in insolvency, both nationally and internationally. While many of the issues addressed in parts one and two are equally applicable to enterprise groups, there are that only apply in the enterprise group context. Part three thus builds upon and supplements parts one and two. At the domestic level, the commentary and recommendations of part three cover various mechanisms that can be used to streamline insolvency proceedings involving two or more members of the same enterprise group. These include: procedural coordination of multiple proceedings concerning different debtors; issues concerning post-commencement and post-application finance in a group context; avoidance provisions; substantive consolidation of insolvency proceedings affecting two or more group members; appointment of a single or the same insolvency representative to all group members subject to insolvency; and coordinated reorganization plans. In terms of the international treatment of groups, part three focuses on cooperation and coordination, extending provisions based upon the Model Law on Cross-Border Insolvency to the group context and, as appropriate, considering the applicability to the international context of the mechanisms proposed to address enterprise group insolvencies in the national context.
Part four focuses on the obligations that might be imposed upon those responsible for making decisions with respect to the management of an enterprise when that enterprise faces imminent insolvency or insolvency becomes unavoidable. The aim of imposing such obligations, which are enforceable once insolvency proceedings commence, is to protect the legitimate interests of creditors and other stakeholders and to provide incentives for timely action to minimize the effects of financial distress experienced by the enterprise. In the second edition, an additional section has been included to address these issues in the context of enterprise group insolvency.
Part five, finalized by UNCITRAL in 2021, 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. Part five 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.