The Implementation of the UNCITRAL Model Law on Cross-Border Insolvency in Great Britain

Journal Issue

Jun 2006

Column Name

European Update

Citation

ABI Journal, Vol. XXV, No. 5, p. 30, June 2006

Topic Tags

International Insolvency

Legislation

Venue/Jurisdiction

Journal HTML Content

Editor's Note: The acceptance of the UNCITRAL Model Law
seems to be gathering momentum. As of the date of this writing, 12
jurisdictions have either adopted it or announced plans to do so.
The express language of the Model Law may in time prove to be less
important than the spirit brought to bear on its interpretation,
particularly by the courts in Mexico, United States and Canada, the
three partners in NAFTA who already share a history of cooperation
in cross-border insolvencies. In Europe, the position is more
complicated. After all, we already have "our" EU
Regulation on Insolvency proceedings. But the EU Regulation is of
little or no use to American corporates, which need assistance over
here. It will be interesting to see if the other core EU member
states follow Britain's lead in adopting the Model Law. The UNCITRAL Model Law on Cross-Border
Insolvency was adopted by the United Nations Commission on
International Trade Law in 1997 and is designed to assist States to
manage transnational insolvency cases in an efficient, fair and
cost-effective manner. In its simplest form, a transnational insolvency
involves an insolvency proceeding in one country, with creditors
located in at least one additional country. In the most complex
case, it involves multiple proceedings, subsidiaries, affiliated
entities, assets, operations and creditors in dozens of nations.
 The Model Law does not attempt to harmonise local insolvency
law. The main issues addressed by the Model Law include the
recognition of foreign proceedings, coordination of proceedings
concerning the same debtor, rights of foreign creditors, rights and
duties of foreign insolvency representatives, and cooperation
between authorities in different States. Since the Model Law is not
binding on any State, its operation depends on how it is enacted
locally. In the United Kingdom, Section 14 of the UK Insolvency
Act 2000 gives the Secretary of State power to enact the Model Law,
with or without modification, by secondary legislation. Pursuant to
this power, the Cross-Border Insolvency Regulations 2006 (the
"Regulations") have been enacted, effective as of 4 April
2006. In enacting the Regulations, the UK Government's policy has
been, to the extent possible, to adopt the Model Law as drafted. 
Most of the differences between the British legislation and the
original Model Law provisions are to take account into the
established local requirements and are not meant to depart from the
underlying intent of the Model Law. These differences include
references to Council Regulation (EC) 1346/2000 on Insolvency
Proceedings (EU Regulation), section 426 of the Insolvency Act 1986, the
British court systems, and the different forms of relief available
under British insolvency law. The scope of the automatic stay
following the recognition of a foreign main proceeding has also been
clarified. In addition, representing a slight departure from
the original Model Law provisions, the U.K. Insolvency Act 2000
provides that where notification to British creditors is by
advertisement only, then the notification to the known foreign
creditors may be by advertisement in such foreign newspapers as the
British insolvency officeholder considers most appropriate. The main
provisions and effect of the Regulations in the United Kingdom are
summarised below. Scope and Structure of the
Regulations The Regulations only apply to Great Britain
(thus, excluding Northern Ireland). Regulation 2 provides that the
Model Law in the form set out in Schedule 1 to the Regulations shall
have the force of law in Great Britain. As mentioned above, the
government's approach has been to "graft" the Model Law
onto British insolvency law. At present, the Regulations do not
apply to certain entities (such as credit institutions, building
societies, insurance companies, utility companies and certain
statutory bodies). However, we understand that the Model Law will
apply to credit institutions and insurance companies pursuant to future
statutory instruments. The Model Law will apply to the
following cases: <blockquote> • where assistance is
sought in Great Britain by a foreign court or a foreign
representative in connection with a foreign insolvency proceeding; 
• where assistance is sought in a foreign State in connection
with a British insolvency proceeding; • where a
foreign insolvency proceeding and a British insolvency proceeding
in respect of the same debtor are taking place concurrently; or 
• where creditors or other interested persons in a foreign State
have an interest in requesting the commencement of, or
participating in, a British insolvency proceeding.

</blockquote> To the extent that the Model Law conflicts with an
obligation of the United Kingdom under the EU Regulation, the
requirements of the latter will prevail. Section 426 of the
Insolvency Act 1986 will continue to be available to provide
assistance (and very powerful assistance at that) in cross-border
insolvency matters on the current terms. The Model Law, the EU
Regulation and section 426 will therefore operate in parallel and
provide a foreign insolvency representative a menu of cross-border
insolvency regimes to consider when seeking judicial assistance in
Great Britain. Advice should be sought in every case as to which is
the most appropriate and effective in any particular case. 
Recognition of Foreign Insolvency Proceedings The
Model Law allows a foreign insolvency representative to apply directly
to a British court without having to meet any formal requirements such
as licences or consular formalities. A British court is required to
decide on an application for recognition of a foreign insolvency
proceeding at the earliest possible time. The court may, at the
request of the foreign representative, grant relief of a provisional
nature, such as staying execution against the debtor's assets, where
such relief is urgently needed to protect the assets of the debtor
or the interests of the creditors. Provided certain criteria are met
(such as the production of a certificate from the foreign court
affirming the existence of the foreign proceeding and of the
appointment of the foreign representative), the British court is
required to recognise the foreign proceeding. The
consequences of recognition differ depending on whether the foreign
proceeding is a foreign main or non-main proceeding. A foreign main
proceeding is a foreign proceeding taking place in the State where
the debtor has the centre of its main interests (COMI), whereas a
foreign non-main proceeding is a foreign proceeding taking place in
a State where the debtor merely has an establishment. The concepts
of COMI and establishment are similar to those in the EU Regulation.
While COMI has no defined meaning, "establishment" is defined
to mean a place of operations where the debtor carries out a
nontransitory economic activity with human means and assets or
services. Note that in the absence of proof to the contrary, the
debtor's registered office, or habitual residence in the case of an
individual, is presumed to be the COMI. Upon recognition of a
foreign main proceeding, the following matters are automatically
stayed or suspended: <blockquote> • commencement or
continuation of individual actions or individual proceedings
concerning the debtor's assets, rights, obligations or liabilities
is stayed; • execution against the debtor's assets; and

• the right to transfer, encumber or otherwise dispose
of any assets of the debtor is suspended. </blockquote>
Note that this automatic stay does not affect any right to enforce
security over the debtor's property, to repossess goods in the
debtor's possession under a hire-purchase agreement and to exercise
set-off, provided it is a right that would have been exercisable if
the debtor, in the case of an individual, had been adjudged bankrupt
or, in the case of a corporate debtor, had been made the subject of
a winding-up order. Upon recognition of a foreign non-main
proceeding, where necessary to protect the assets of the debtor or
the interests of the creditors, the court may, at the request of the
foreign representative, grant any appropriate relief, including the
matters covered by the automatic stay arising from the recognition
of a foreign main proceeding. Other forms of available relief include
the following: <blockquote> • providing for the
examination of witnesses, the taking of evidence or the delivery
of information concerning the debtor's assets, affairs, rights,
obligations or liabilities; • entrusting the
administration or realisation of all or part of the debtor's
assets located in Great Britain to the foreign representative or
another person designated by the court; and • any
additional relief that may be available to a British insolvency
office-holder under the law of Great Britain. </blockquote> In
granting, modifying or denying the forms of relief discussed above, the
court must be satisfied that the interests of the creditors
(including any secured creditors or parties to hire-purchase
agreements) and other interested persons, including, if appropriate,
the debtor, are adequately protected. Apart from seeking
judicial recognition of a foreign insolvency proceeding, a foreign
insolvency representative is entitled to participate in a proceeding
regarding the debtor under British insolvency law, to intervene in any
proceedings in which the debtor is a party and to make an
application to the court to avoid acts detrimental to creditors
(such as unlawful preferences and transactions at an undervalue).

Cooperation with Foreign Courts and Foreign Insolvency
Representatives The court may cooperate to the maximum
extent possible with foreign courts or foreign representatives,
either directly or through a British insolvency officeholder. In
this connection, the court is entitled to communicate directly with,
or to request information or assistance directly from, foreign courts
or foreign representatives. A British insolvency officeholder
is, in the exercise of his functions and subject to the supervision
of the court, mandated to cooperate to the maximum extent possible
with foreign courts or foreign representatives, provided it is
consistent with his other duties under the law of Great Britain. In this
connection, the British insolvency officeholder is entitled to
communicate directly with foreign courts or foreign representatives.
 The forms of cooperation mentioned above include the
following: <blockquote> • the appointment of a person
to act at the direction of the court; • communication of
information by any means considered appropriate by the court; 
• coordination of the administration and supervision of the
debtor's assets and affairs; • approval or
implementation by courts of agreements concerning the coordination
of proceedings; and • coordination of concurrent
proceedings regarding the same debtor. </blockquote>

Creditor Protection The Model Law contains various
provisions aimed at protecting creditors' interests. For example,
the Model Law provides that foreign creditors have the same rights
regarding the commencement of, and participation in, a proceeding
under British insolvency law as creditors in Great Britain. Whenever
under British insolvency law notification is to be given to
creditors in Great Britain, such notification shall also be given to
the known creditors that do not have addresses in Great Britain.
 Enacting the "hotchpot" rule, it is provided that a
creditor that has received partial payment in respect of its claim
in a proceeding pursuant to a law relating to insolvency in a
foreign State may not receive a payment for the same claim in a
proceeding under British insolvency law regarding the same debtor,
so long as the payment to the other creditors of the same class is
proportionately less than the payment the creditor has already received.
This is without prejudice to secured claims or rights in rem.
 Concluding Remarks Since the EU Regulation will
apply in every situation where the COMI of the debtor is located
within the EU (apart from Denmark), and section 426 of the
Insolvency Act 1986—with its very broad range of substantive
assistance—will be available in many cases where there is an
insolvency proceeding on foot in another Commonwealth country, it is
likely that U.S. practitioners will be calling most often on the
UNCITRAL Model Law in the U.K. context. We believe that the
availability of the Model Law in both the United Kingdom and the
United States will inspire extensions of the considerable body of
common law authority developed over many years in response to the
obvious need for cooperation on insolvency matters between two major
trading partners. The adoption of the Model Law in the United
Kingdom is cause for celebration.

Journal Authors

Sandy Shandro

Journal Date

Thursday, June 1, 2006 - 12:00

Bankruptcy Rule

2006

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