Subchapter V in International Applications: How Is the World Proposing to Deal with Simplified Insolvency?

The United Nations Commission on International Trade Law Working Group V has been working on a simplified insolvency regime for six sessions because “[m]icro, small and medium-sized enterprises (MSMEs) (MSEs) constitute the majority of businesses in economies around the world.”[1] Its efforts are aimed at ameliorating the effects of rigid insolvency schemes that stifle the efforts of small business enterprises to reorganize.

Standard business insolvency processes, where they are costly, complex, lengthy and procedurally rigid, may be unavailable, 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.[2]

With the enactment of subchapter V of chapter 11 (Sub V) of the U.S. Code, the U.S. has taken an important lead role in formalizing innovative techniques for dealing with MSEs. This article discusses just a few of the interesting similarities between Sub V and the UNCITRAL Model Law (Draft).[3]

Simplicity

Like Sub V, the central purpose of the Draft is to provide expeditious, simple and low-cost proceedings to make access protections and issue-resolution easily available to MSEs. States adopting the law are urged to provide services of independent professionals, templates, schedules and standard forms, together with electronic means of access to the system. As with many existing international insolvency regimes and the U.S. Code, the default fall-back position is liquidation, but the goal is to provide a simple system for the reorganization of “viable” MSEs.

Similar provisions are found throughout Sub V. The chief objective of the Sub V trustee is the development of a consensual plan. Accomplishing this goal is rewarded with less stringent confirmation requirements and broader relief. With the removal of the absolute priority rule, incorporation of abbreviated disclosures in place of a formal disclosure statement, and judicial ability to confirm plans without the consent of any accepting class of creditors, Sub V makes it possible for an SME to reorganize on a fair and equitable basis without being held hostage by powerful constituencies.

Control

The Draft provides for debtor-in-possession rights and duties similar to those found under Sub V. States are instructed to spell out the conditions under which a debtor will not retain control and clear expectations for removable conduct. Finally, the Draft grants to all interested parties the right to participate in, and obtain information about, the insolvency proceeding.

Though not new to chapter 11, which grants a specific right of any interested party to be heard on “any issue,” [4] the emphasis in the Draft on both free access and protection of trade secrets and sensitive information seeks to establish a productive exchange in place of a rigid discovery regime.

Process

One important goal of the Draft system is the protection of interested parties without notice. States are urged to specify that claims of creditors not notified of the commencement and having not joined in the proceeding are unaffected and excluded from the effect of any discharge. While the Code’s provisions on notice are less specific about the effect of a lack of notice of the proceeding, constitutional due process effectively prevents against uninformed losses under the Code.[5]

The Draft puts in place an early determination, based the debtor’s liquidation analysis, of whether the case will proceed to reorganization or default to liquidation and immediate distribution. This stands in contrast to the default DIP and right of exclusivity granted a Sub V debtor to propose a plan, and the fault-based requirements for removal of the DIP and their replacement with a trustee.

Stay and Relief

Following a more collaborative scheme, the Draft does not provide similar protections as the Code with respect to a stay. Restrictions of the right of a consensual secured creditor to protect asset value is not included in the scope of a stay order. A broader stay is an option, to be specified by the enacting state, but it is not a fundamental protection.

Plan

The plan contemplated in the Draft includes an interesting provision not found under the Code. “The insolvency law … should specify the …  (b) list of creditors and the treatment provided for each creditor by the plan (e.g., how much they will receive and the timing of payment, if any)….”[6] Distinct from Sub V’s routine of creating classes of similarly situated creditors, the Draft anticipates a specific creditor-by-creditor rendition of treatment.

Discharge

The Draft explains that “full discharge” should be conditional upon the successful implementation of the reorganization plan and should take effect immediately upon confirmation of the plan. Of course, this differs from the bifurcated consensual vs. nonconsensual discharge delay provisions of Sub V. However, it is reflective of the overall process envisioned in the Draft, which calls for reorganization once the initial liquidation hurdle is overcome.

Conclusion

Time will tell whether this working committee draft is published for adoption by member states and, thereafter, whether the states actually do so.[7] While the U.S. Constitution provides for the enactment of a uniform law of bankruptcy,[8] no such parallel provision exists under the UN charter or pre-existing international insolvency treaties.[9] This simplified regime is an important step forward in moving what has been an entirely cooperation-based, and therefore complex insolvency system, to a small, business-friendly environment for preserving asset value, leveraging experience, and protecting the viability of small businesses around the world.