In July, the Government published its report on The United Nations Commission on International Trade Law (UNCITRAL) introducing two new Model Laws with the aim of improving harmonisation of international trade and insolvency procedures: the Model Law on Enterprise Group Insolvency (MLEG) and the Model Law on Recognition and Enforcement of Insolvency-Related Judgments (MLIJ).The Insolvency Service is proposing to adopt the new measures contained in the MLEG and MLIJ as set out below.
The UK has been a member of UNCITRAL since 1968 and has since implemented the UNCITRAL Model Law on Cross-Border Insolvency (the Original Model Law) through the Cross Border Insolvency Regulations 2006 (“CBIR”). This Original Model Law provides a legal framework for recognition of foreign insolvency proceedings across 52 states (including the UK) and for cooperation across jurisdictions in cross-border insolvency proceedings. The MLEG and MLIJ aim to make the process even more internationally collaborative.
MLEG - coordination of group company insolvency
While the Original Model Law provides a framework for the recognition of a single insolvency proceeding in another jurisdiction, MLEG goes one step further to address situations where multiple group entities enter insolvency, where their financial and business affairs are intertwined. The MLEG also provides for recognition of group insolvencies where the procedures originate in two or more jurisdictions (or even where they are all in the same jurisdiction). The MLEG will in theory maximise the value of the group’s assets by improving coordination and cooperation between courts and therefore protecting the interests of group creditors by maximising their returns.
The “Planning Proceeding”
The lynchpin of the MLEG is the introduction of a new “planning proceeding”, which aims to produce a “group insolvency solution”. The “planning proceeding” is a single insolvency proceeding for multiple members of the same group regardless of their location, coordinated by a group representative. This could benefit both international and domestic group companies within the UK, allowing several group companies to benefit from a single “insolvency solution”, which is coordinated to deal with the business of the group collectively.
It is hoped that a planning proceeding would produce better returns for creditors as a whole, by avoiding the need for each entity to open separate (often costly) insolvency proceedings and allowing the insolvency practitioner to treat creditors according to the relevant insolvency law applicable to that local group entity. This, however, has the potential to create tension between English and foreign insolvency laws, where the MLEG permits limited modifications to the priority of payments in accordance with the relevant foreign law. It will certainly be interesting to see the response to the proposals on this issue.
MLIJ – recognition of foreign insolvency-related judgments
The MLIJ aims to plug a gap in the Original Model Law by explicitly providing a route for cross-border recognition of judgments associated with insolvency proceedings. In England and Wales, a foreign insolvency judgment cannot currently be enforced under the Original Model Law, so this is a welcome development and extension to the existing framework.
The “Rule in Gibbs”
The Insolvency Service, however, does not propose to implement the MLIJ in full, due to concerns about undermining the old English common law principle known as the “rule in Gibbs”. This principle (originally established from case law in 1890) provides that the debtor’s obligations under a contract governed by the laws of a particular country cannot be compromised or discharged by a foreign proceeding (unless a creditor submits to that foreign proceeding). This ancient principal pre-dates the modern concept of ‘centre of main interests’ and current thinking on how best to manage cross-border insolvencies. The Insolvency Service does however intend to re-examine the “rule in Gibbs” and its impact at a future date, so implementation of the MLIJ could also be reconsidered in future.
Currently, the Insolvency Service instead proposes the adoption of a provision named “Article X” (created under the MLIJ) to be inserted into the Original Model Law. Article X clarifies that the relief available under article 21 of the Original Model Law (i.e. relief that may be granted upon the recognition of a foreign law proceeding) includes recognition and enforcement of a judgment. Adopting Article X, rather than the MLIJ in full, shall provide for recognition of insolvency-related judgments on an application to court (at the court’s discretion), thereby preserving the “rule in Gibbs”.
The adoption of Article X would provide some welcome clarity on the recognition of foreign judgments in England and Wales, but its practical impact remains uncertain. Firstly, judgments can only be recognised in relation to foreign insolvency proceedings that have already obtained recognition under the Original Model Law (albeit the applications for recognition could conceivably be combined for expediency). Secondly, the court retains a wide discretion to refuse recognition, including where creditors’ interests may be at risk, where the application offends the “rule in Gibbs” or on other public policy grounds. Perhaps most importantly at this stage, the UK is also the first state to indicate its intention to adopt either Article X or MLIJ (or indeed MLEG). Consequently, while these measures could be the first step towards a far more collaborative and cohesive approach, there will be no reciprocal recognition of English insolvency-related judgments in other jurisdictions, at least initially. Therefore, while the proposals are to be welcomed, the benefit to UK creditors and/or businesses is likely to be limited until the new model laws are adopted more widely.
This article was first featured in European Business Magazine and can be accessed here.