This part explains the issue of cross-border insolvency, and outlines the background to the development of the UNCITRAL Model Law on cross-border insolvency.
What is cross-border insolvency?
Cross-border insolvency is a term used to describe circumstances in which an insolvent debtor has assets and/or creditors in more than one country.
Many businesses have interests stretching beyond their home jurisdictions. Firms are increasingly organising their activities on a global scale, forming production chains including inputs that cross national boundaries. With the advent of sophisticated communications and information technology cross-border trade is no longer the preserve only of large multi-national corporations.
These factors have led to an increasing number of situations where Australian businesses are involved in matters where cross-border insolvency issues arise. This trend is not likely to change.
Risks of cross-border insolvency
One of the risks that all businesses face is that of a trading partner's failure. Most domestic laws provide for the handling of an insolvent enterprise. Typically, domestic laws will prescribe procedures for:
- identifying and locating the debtors' assets;
- 'calling in' the assets and converting them into a monetary form;
- identifying and reversing any voidable or preference transactions which occurred prior to the administration;
- identifying creditors and the extent of their claims, including determining the appropriate priority order in which claims should be paid; and
- making distributions to creditors in accordance with the appropriate priority.
In a cross-border insolvency context, additional complexities that may arise include:
- the extent to which an insolvency administrator may obtain access to assets held in a foreign country;
- the priority of payments: whether local creditors may have access to local assets before funds go to the foreign administration, or whether they are to stand in line with all the foreign creditors;
- recognition of the claims of local creditors in a foreign administration;
- whether local priority rules (such as employee claims) receive similar treatment under a foreign administration;
- recognition and enforcement of local securities over local assets, where a foreign administrator is appointed; and
- application of transaction avoidance provisions.
The additional complexities surrounding cross-border insolvencies necessarily result in uncertainty, risk and ultimately costs to businesses. It would be of overall benefit to businesses in all countries to have adequate mechanisms in place to deal efficiently and effectively with cross-border insolvencies. Given Australia's place in the world economy, it is especially important to adopt policies that promote efficiency, reduce legal uncertainties and transaction costs and enhance international trading efficiency.
Background to the UNCITRAL Model Law
UNCITRAL was created by the United Nations in 1966 'to further the progressive harmonisation and unification of the law of international trade'.
The original suggestion to undertake work on cross-border insolvency was made to UNCITRAL by practitioners directly concerned with the problem, in particular at the UNCITRAL Congress, 'Uniform Commercial Law in the 21st Century' held in May 1992.
Australia recognised the importance of this issue for international trade and its delegates to UNCITRAL actively encouraged the Commission to pursue work in this area. Australia's experience with attempting to recover assets from foreign jurisdictions in the wake of high profile corporate collapses in the late 1980s and early 1990s provided impetus for Australia's support for the work.
There was some opposition to UNCITRAL commencing this work, along the lines that national differences in approach to insolvency law and policy would present insuperable difficulties to getting agreement among countries. However, in 1995 the Commission agreed to establish a Working Group to develop model legislation relating to cross-border insolvency. The Treasury and the Attorney-General's Department, which has responsibility for personal insolvency policy, supported the Working Group of UNCITRAL in the development of the Model Law.
Over the next two years the text of the Model Law was developed at meetings of the Working Group, comprising representatives from 36 UNCITRAL member countries and 40 observer states, in consultation with 13 international organisations representing practitioners, judges and lenders. In comparison with other comparable projects, the Model Law was developed quickly, due in large part to the enthusiasm for the work on the part of the participants.
The Working Group on Insolvency presented its finalised text to the UNCITRAL annual session of 1997, where it was endorsed by the Commission. In association with the Model Law the Commission has approved the publication of a Guide to Enactment of the UNCITRAL Model Law on Cross-Border Insolvency.1 The Model Law is reproduced in the appendix to this Discussion Paper.
1 The Model Law and Guide is available at http://www.uncitral.org/english/texts/insolven/insolvencyindex.htm.