Earlier in December 2019, LLM candidate and graduate lawyer Samantha Pacchiarotta and final year law student Cassandra Heaslip attended Insolvency Working Group V’s 56th session in Vienna on behalf of LAWASIA and Australia’s UNCCA, the UNCITRAL Co-ordination Committee for Australia.
The topic was how to deal with micros to small insolvencies.
Together, they had the opportunity to witness and report on the international deliberations on a draft text for the development of a simplified insolvency regime for micro and small-sized enterprises – MSEs.
As an indication of the quality and objectivity of the draft text being considered, here are three areas of analysis in its current draft, each relevant to issues being debated in Australia – the unique problems with MSE insolvencies, debtor in possession models, and lack of business education.
- Standard business insolvency processes, because of their cost, length and procedural inflexibility and complexity, may be unavailable or prohibitive 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.
- Efforts are being made at the international, regional and national levels to find solutions tailored to the specific needs of MSEs in financial distress in the light of the broad impact of MSEs insolvency on job preservation, the supply chain, entrepreneurship and the economic and social welfare of society. Solutions sought aim at allowing deserving MSEs to remain in the labour market by preserving their know-how and skills and restarting entrepreneurial activities, drawing on lessons from the past.
A debtor in possession model
- Use of the debtor-in-possession approach as the norm in simplified reorganization proceedings is usually justified by reference to the characteristics of MSEs. They include that the MSE debtor often has unique knowledge about its business, as well as ongoing relationships with creditors, suppliers and customers. In addition, the insolvency estate can be insufficient to fund the appointment of an insolvency representative. Furthermore, the risk of being displaced from the helm can create a disincentive for the MSE debtor to seek timely commencement of insolvency proceedings.
- The debtor-in-possession approach may not be appropriate in some cases, for example where the MSE debtor was responsible for misappropriation or concealment of property or poor management that caused its financial distress. It may also be inappropriate in involuntary commencement where the MSE debtor could be expected to be hostile to creditors or where the plan was imposed on the MSE debtor by creditors. In such cases, the competent authority may appoint a third party, such as the independent party, to take on a supervisory role or even displace the MSE debtor or make an interim stay order preventing the debtor from taking certain actions (such as disposing of assets or incurring liabilities capped by a specific value).
- In some jurisdictions, an insolvency professional may be a mandatory participant in insolvency proceedings and, although a debtor-in-possession approach may still be possible, it may need to be coupled with the involvement of an insolvency professional who will closely supervise the process and keep the competent authority continuously informed. (See recs. 112, 113 and 157 of the Guide).
- Insufficient knowledge of business management and financial transactions is cited as a common cause of business failure among MSEs, especially first-time starters. Some jurisdictions therefore consider mandatory training on those issues for MSEs a tool to prevent insolvency and to facilitate a fresh start. Such training usually addresses pre-insolvency aspects, including available means for addressing the situation of financial distress, obligations of business owners and managers in the period approaching insolvency and consequences of not taking appropriate actions at an early stage of financial distress.
- Some governments also provide training to competent State authorities and insolvency practitioners with the aim of building the capacity in the public and private sectors necessary to handle specificities of MSE insolvencies.
A full report is on the UNCCA website. UNCCA offers its reports to relevant government departments in order to inform insolvency law reform in Australia. Current law reform reviews include that of the ASBFE Ombudsman and the pending review by ARITA.
The next meeting of UNCITRAL is in New York in May 2020.