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Michael Murray’s on-going commentary on issues in corporate and personal insolvency law and related policy and law reform, in Australia and internationally. Given the scope of insolvency, this extends to business, consumer and professional conduct, and ethics, governance and regulation, criminal, tax, environmental and administrative law, and the courts and government.

 

Protocol for International Recognition of Insolvency Proceedings Affecting Natural Persons

As INSOL International explains, this Protocol of June 2017 is a project that has been completed by members of the INSOL Small Practice Issues Committee.

The foundation of the Protocol is the promotion of automatic recognition of insolvency proceedings for individuals, either as consumers or sole traders, where there are few assets available to fund court proceedings and claims are not, in a global sense, material.

The Protocol has been provided to all member associations of INSOL in the hope that it will be adopted by them and submitted to legislators to consider as jurisdictions update their insolvency legislation.

The project leader of the group was Bill Courage of BDO in Canada, and our eminent Australian barrister, John Baird, is a member of the Committee.

As the protocol explains, while the existing Model Law on Cross-Border Insolvency is not confined only to corporate debtors, the costs involved in using it for most insolvent individuals are often prohibitive.

The protocol therefore only attempts to address issues related to insolvencies with low values of assets and liabilities. Those with substantial assets or issues remain better addressed by more robust proceedings in the relevant jurisdictions using the Model Law.

Parallel projects

This focus on personal insolvency is an aspect of other work being done internationally that seeks to address the needs of the rising economies that depend on consumer demand and credit finance. Greater employee mobility across jurisdictions is another issue.

UNCITRAL’s Working Group I is tasked with cross-border issues in micro to small to medium enterprises (MSMEs) and its Working Group V has recently been given the task of examining processes to deal with cross-border MSME insolvency.  And the World Bank produced its report in May 2017.

These tend to look at the issue from a business perspective, crossing over the legal divide between persons and companies maintained in Australia.

Australia

There is little focus on MSMEs in Australia. Apart from the government’s proposed reduction in the period of bankruptcy to one year, the Productivity Commission has made recommendations for dealing with SME corporate insolvency.  The government has not accepted these recommendations, referring instead to its safe harbour and ipso facto reforms, and declining, again, to consider the idea of a Public Interest Administration Fund for low or no asset insolvencies that would be funded by increasing the annual review fee for company renewals.

The Protocol should properly provide at least a guide for MSME reform in Australia.

 

 

 

 

The Protocol

The Committee has offered these following proposals in respect of a series of relevant issues, fully explained in each case in the Protocol.

High level objectives

The objective is to achieve streamlined, and if possible, automatic recognition internationally for proceedings relating to natural persons with limited assets and liabilities to avoid the need for expensive supplementary court applications in other jurisdictions.  Notwithstanding differences in approach, the objective of the protocol is to promote automatic recognition except where provisions of the initial proceedings are manifestly incompatible with the non-main country.

Initiation of Proceedings

There should be only one collective proceeding for a single debtor led from one jurisdiction.

A formal process is opened when a court proceeding is commenced, or considered by the jurisdiction to be opened.  Jurisdictions should provide for recognition of foreign insolvency proceedings, preferably automatically.

Determination of Centre of Main Interest (COMI)/Residence

To consider applying two different time periods of ordinary residency; when a creditor initiates proceedings, and when a debtor initiates proceedings.  The objective would be to discourage insolvency tourism, while at the same time allowing a creditor in a jurisdiction to access a domestic insolvency system if necessary.

If the debtor is filing, the debtor has to be in the jurisdiction for six months (or longer?) prior to the date of filing as an ordinary resident.  If the creditor wants to start, it can do so at any stage.

In a creditor filing the creditor should have the option of opening the proceeding in either the jurisdiction of the debtor or in the country where the creditor-debtor relationship was created during a period when the debtor had established COMI in that jurisdiction.

There is a need to recognize that there is a risk of abuse where there is a change of COMI in the period prior to the filing.  In cases where there is perceived abuse, parties will still require access to the courts to resolve the dispute.  It is recommended that the principles set out in the Model Law be used for challenges to COMI.

Stay of Proceedings

Once a proceeding has commenced all other proceedings that affect the insolvent estate will be stayed. It is mandatory that the administrator of the insolvency proceeding notifies all creditors worldwide immediately.

The stay of proceedings should be extended to all proceedings world-wide. For secured creditors, generally the laws of the jurisdiction where the secured asset is located should apply.

Voting 

If a debtor wishes to commence a repayment plan or go into liquidation, a voting process is preferred.  It is important that creditors, both domestic and foreign, have the opportunity to be involved in the process and as such they should be able to vote on all aspects relevant to the insolvent estate, or to otherwise express opposition.  While the rules may vary by jurisdiction, as long as there is the opportunity for creditor input on a plan, it should be binding in all jurisdictions once the main jurisdiction has approved the process in accordance with its laws.

Ring Fencing

Ring fencing is not appropriate.  Where a jurisdiction, presumably being a non-main jurisdiction, applies ring fencing principles, creditors in that jurisdiction are not able to participate in a dividend in the main proceeding until such time as the dividend in the main proceeding exceeds the amount already received from the ring fenced distribution in the non-main jurisdiction.

Exempt Assets

That the lex concursus (the law of the state where the insolvency proceeding is commenced) applies for exempt assets.

Disposal of Assets in Non-Main Jurisdiction

There should be a pooling of assets from all jurisdictions in the main proceeding.  Any necessary recognition orders should be simplified where at all possible.

Repayment Plans/Required Payment from Income/Proposals

That lex concursus applies for re-payment plans. It may be necessary to obtain an actual court order evidencing the approval of a repayment plan that provides for cram down in order for it to be binding on non-main jurisdictions.

Claims Administration

That all creditors, regardless of jurisdiction, are able to file claims in the proceeding.  The lex concursus will apply for the date of determining claims.  Claims of creditors will be converted to the currency of the main proceeding at the exchange rate in effect on the date of the determination of claims and all creditors, and regardless of jurisdiction will share equally, subject to the comments regarding ring fencing above.

Secured Creditors and Novation of Secured Debt Contracts

Surrender of Assets

When assets are surrendered to the secured creditor either the IP or the secured lender would sell the asset and apply proceeds to the secured debt.  In the event of a surplus realized over the value of the secured debt, the funds should be remitted to the main proceeding for distribution to other creditors.  In the event there is insufficient asset value to pay the secured claim in full, the balance owing is to be included as an unsecured claim and will share equally with other creditors for the amount of the shortfall.

Retention of assets

Novation of Debt

That assets may be retained by the debtor subject to both the lex sitae and the lex concursus.  Payments on secured debt must – if not made by a third person – be sourced from income that is not required to be paid to the insolvency estate pursuant to a mandatory repayment plan.

Novation of contracts should be permitted in accordance with the lex sitae (the law where the property is located), and ensuring that asset value in excess of the value of the secured debt is returned to the main proceeding.

On a practical basis dealing with secured assets will be dealt with according to the lex sitae for non-main jurisdictions and lex concursus for assets in the main jurisdiction.

Other Considerations re Cross-border Problems That Can Occur in Novation       

Cost of Proceedings 

Every jurisdiction therefore should ensure that the practitioners’ remuneration is paid in priority irrespective from which jurisdiction the money is claimed.  Fees should be paid as first priority and this would apply to secured creditors, state officials as well as private individuals.

Priority and Preference Claims   

The lex concursus will apply to preferential claims.

Tax Authorities / Government Debt    

All preferential creditors should be bound by the lex concursus of the jurisdiction where the proceedings are commenced, assuming that this is consistent with the overall objectives of this process.

Where the above proceedings cannot deal with such claims, in such circumstances, those creditors can start parallel proceedings to recover payment if the preconditions for such proceedings apply.

Discharge of Debt

Once a proceeding has been opened and there is recognition, all non-main jurisdictions should recognize the discharge in accordance with the provisions of the main jurisdiction.

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