A small group from Australia is in Vienna this week to attend the regular meeting of UNCITRAL Working Group V (Insolvency).
WGV is currently examining three main issues:
- proposed model laws or guidelines on the cross-border insolvency of enterprise groups;
- the obligations of directors of enterprise group companies in the period approaching insolvency; and
- guidelines for dealing with the insolvency of micro-small to medium enterprises.
These follow a recent major outcome of WGV being a new Model Law on the Recognition of Insolvency-related Judgments, now open for adoption by members states, including Australia.
The team is headed by Professor Chris Symes of the University of Adelaide, with two students – Samantha Pacchiarotta and another – under the aegis of UNCCA,* representing LAWASIA as an observer. It should be noted that Australia does not attend WGV sessions but the US, UK, Canada, Japan, Singapore, China and most EU countries do attend.
Enterprise group insolvency
As to enterprise groups, what is to be called the “model law on enterprise group insolvency” is being considered by WGV this month, along with a draft guide to enactment of the model law. This model law has been the subject of extensive discussions and development in past sessions of WGV.
Directors’ obligations concerning enterprise groups in the period approaching insolvency
A draft text on the obligations of directors of enterprise group companies in the period approaching insolvency goes with that proposed model law. The Working Group notes that the issues needed to be considered carefully so that solutions would not hinder business recovery, make it difficult for directors to continue to work to facilitate that recovery, or influence directors to prematurely commence insolvency proceedings.
Given that the model law on enterprise groups is expected to be nearing completion, WGV will be considering whether any further adjustments to the draft text on directors’ obligations might be needed required in order for it also to be finalised at the same time as the draft model law on enterprise group insolvency.
This is an issue being examined generally in many jurisdictions, with Australia’s safe harbour protection being one. How it applies in the context of a corporate group is not specifically addressed in the new law.
Insolvency of MSMEs
The insolvency of micro, small and medium-sized enterprises (MSMEs) raises a number of useful ideas for Australia, where the law is not is not particularly satisfactory, and where government reforms remain on the agenda.
The first draft of a text on MSME insolvency is being considered by WGV, based on the need for streamlined approaches that are “equitable, fast, flexible and cost efficient”.
The WGV draft text gives a useful overview of MSMEs –
“relatively undiversified as regards creditor, supply and client base; as a result, they often face the cash flow problems and higher default risks that follow from the loss of a significant business partner or from late payments by their clients. They also face scarcity of working capital, higher interest rates and larger collateral requirements, which make raising finance, especially in situations of financial distress, difficult, if not impossible.
Access to credit is often made subject to the granting of personal guarantees by the owners or their relatives and friends whose personal assets could be of equal or greater value than that of the small debtor. Owners thus frequently provide not just equity, but also debt funding.
Any physical assets of small debtors, which may be the main or the only assets of the value to creditors, may already be encumbered to secured creditors with “hold-outs” by such creditors being common in the context of negotiating a solution to financial difficulties of the MSME. And unencumbered assets are usually of little or no value. Because the costs of participating in the insolvency proceedings may outweigh the return, those creditors stay disengaged, thus jeopardising reorganization leaving liquidation as the only option.
MSMEs often have poor or non-existent records; there may be no clearly established ownership of key commercial assets; work for the debtor may not be documented or remunerated and the use by the owner of their own funds may not be documented. owner may use their own finances to fund or support the business without necessarily documenting that expenditure.
MSMs are often characterized by a centralized governance with the management unwilling to initiate insolvency protection because of the risk of losing control. They are also prone to adopt more high-risk strategies in attempts to save the business. These factors may contribute to the financial crisis and lead to the debtor addressing financial difficulties too late”.
Some particular issues
Those latter issues are discussed in the context of the merits of a debtor in possession model, among others. Other issues discussed are the funding of MSME insolvency, in the context of a government liquidator or other external funding; the need to limit costly court involvement, and formal intervention by insolvency practitioners. The need for discharge of the debtor is important, and within a reasonable time.
Some jurisdictions simply allow assetless insolvent companies to be disposed of without examination, with the attendant potential for abuse; to some extent, this is the case in Australia.
The need for discharge of the debtor is important, and within a reasonable time. The paper notes the trend towards that time being reduced in many jurisdiction, and as contemplated in Australia’s proposed on year bankruptcy.
WGV will be giving a report on its December 2018 deliberations for the next meeting of UNCITRAL to be held in Vienna, from 8 to 26 July 2019. WGV’s next 55th session is to be held in New York from 28 to 31 May 2019.
* UNCCA, the UNCITRAL Coordination Committee for Australia, is an organisation comprising members of the Australian legal community who are dedicated to promoting the work of UNCITRAL in Australia. Its chair is the Hon Justice Neil McKerracher, of the Federal Court of Australia. I am the chair of an expert advisory group for WGV and attended WGV in Vienna in December 2016.
 United Nations Commission on International Trade Law Working Group V (Insolvency Law) Fifty-fourth session Vienna, 10–14 December 2018
 Working Group I is considering MSME structures, but not their insolvency. It has been decided that it is not necessary to wait for the results of the work being done by WGI in order to commence the study of insolvency regimes for MSMEs.
 As paraphrased. See www.uncitral.org