Michael.1
Insolvency and related law and policy, and more

Michael Murray is an Australian author and commentator on corporate and personal insolvency law and related issues, in Australia and internationally. He has a strong law and policy background, is independent of any connections, and his views are his own. He gives no legal advice. 

Virtual Panel Series – UNCITRAL Texts and COVID-19 Response and Recovery – MSMEs and access to credit and secured lending

An interest group in Australia, the UNCITRAL Coordination Committee for Australia (UNCCA), has a role in monitoring and attending UNCITRAL[1] sessions including those of UNCITRAL’s Working Group V – Insolvency. Its representatives attended part of an on-line session on the difficulties caused for MSMEs worldwide by the COVID-19 crisis. The MSME session, and access to credit and secured transactions, of what is termed the Virtual Panel Series – UNCITRAL Texts and COVID-19 Response and Recovery, on was held on Monday, 13 July 2020.

Although UNCCA representatives were unable to attend what became the cancelled New York session in May 2020, following the successful session in Vienna in December 2019,

progress has been made off-line among the group’s members in preparing guidelines for the insolvency of micro, small and medium-sized enterprises (MSMEs).[2]

MSMEs

By way of background, MSMEs represent the majority of businesses in most countries including Australia and account for a large portion of overall employment. In developing countries, where the World Bank reports that MSMEs are being particularly hard hit by the virus crisis, they represent approximately 90% of private sector firms and generate more than half of the jobs in those countries.

MSMEs worldwide experience similar obstacles during their life cycle, including having to bear a disproportionate regulatory burden, having more limited access to capital or banking services, and having limited access to efficient insolvency proceedings. UNCITRAL has reported that they may be discouraged by standard business insolvency processes because of their length, procedural inflexibility and costs, as well as the inherent risks of loss of control over the business. MSME debtors prefer less costly, faster and simpler proceedings and those that facilitate a fresh start through discharge.

Access to credit is often made subject to the granting of personal guarantees by the owners, thereby “effectively blur[ring] the distinction between personal and business debt”: Sarra.

Since 2013, UNCITRAL has been working to reduce the legal obstacles faced by MSMEs in a number of key areas.

That has now become more critical given lockdowns and other measures to mitigate the COVID-19 pandemic which have reduced demand for products and services, as well as disrupted supply chains, particularly in sectors where MSMEs operate.

Despite temporary relief measures implemented by states, including Australia, insolvencies of MSMEs are expected to rise dramatically. The crisis has severely hampered their capacity to generate the revenue necessary for their continued operation, making them even more dependent on credit from financial institutions and other financiers.

The 13 July session

The MSME session on 13 July explored the importance of efficient, effective and simplified insolvency proceedings for resolving their financial distress and considered possible policy and legislative measures to enhance MSME access to credit, including through reforms based on UNCITRAL texts on secured transactions.

The session was chaired by Mr Mahesh Uttamchandani of the World Bank Group and in relation to insolvency the panel comprised Professor Jason Kilborn of the University of Illinois, Chicago; Ms Kathlene Burke, Board Member of International Women’s Insolvency & Restructuring Confederation (IWIRC); and Ms Antonia Menezes also of the World Bank Group.

The Access to Credit and Secured Transactions was moderated by Professor Louise Gullifer of the University of Cambridge, Mr John Wilson of the World Bank, Mr Marek Dubovec of the National Law Centre and Ms Mary Ellen Iskenderian, President and CEO, Women’s World Banking.

Australia

In common with most comparable jurisdictions, Australia is said to be confronting a large number of business insolvencies, both corporate and personal.

Corporate

Australia has no particular streamlined process for insolvent MSME companies,[3] which the figures show dominate Australian business. In fact, many insolvencies are assetless and the system is said to be such that the limited remaining assets go mostly to the costs of liquidation.[4] There is no government role, and figures suggest that for every company wound up, another 4 simply go through a default deregistration process into what has been described as a potential “black hole” of “directors’ misdeeds and unpaid debts”.[5] In that sense, as one correspondent has suggested, at least ASIC has oversight of those disappeared companies.

The funding of such insolvencies was raised, with ideas offered of taxing the larger insolvencies and restructurings to fund the smaller, a system in effect employed in Australia; or having the state take a role, as in the UK and New Zealand. The willingness let alone the capacity of what is solely a private corporate insolvency profession to effectively take on unfunded liquidations in Australia has been questioned.[6] A potential fall back is the view of one Australian Judge, that

“the situation will often occur that there will be little money in the winding up and the liquidator will have to cut corners that he might not otherwise cut, and the court must be very careful not to impose too strict a duty which would stop that happening”.

Changes to the law would be preferable.

Personal

In personal insolvency, Australia has a debt agreement regime that allows lower asset/liability debtors to come to a repayment agreement that avoids bankruptcy.  Bankruptcy lasts for 3 years in Australia and can be extended.  The maintenance of the restrictions of bankruptcy for at least 3 years on those whose business was ended by COVID-19 would have economic impact. While, as a director of a failed and insolvent company, an individual can start afresh immediately, that individual may also be bankrupt because of the common intertwining of liabilities through personal guarantees.

Access to credit in Australia is another issue requiring government attention, although difficult in light of the deferral of large amounts of debt, until, at the moment, September 2020 – hence the reference here to a looming “insolvency cliff”.

Other jurisdictions

A number of countries were represented at the session. Thailand reported on its 2016 introduction of a rehabilitation chapter for MSMEs and of pre-packaged insolvencies, with a debtor in possession approach.  This is being broadened in scope along with a focus on out of court pre-insolvency resolutions.  Japan and Colombia also spoke, and Russia. Australia was not represented.

Ms Antonia Menezes of the World Bank Group reported that the Bank plans to shortly release revisions to the its Principles for Effective Insolvency and Creditor/Debtor Regimes with a focus on SME insolvency in light of the current crisis.

No doubt these international law reform developments and ideas will receive close scrutiny by the Australian government.

Michael Murray, Chair, Expert Advisory Group, WGV, UNCCA.

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[1] United National Commission for International Trade Law.

[2] See Guiding the way: recent developments in UNCITRAL’s simplified insolvency regime, by Samantha Pacchiarotta and Cassandra Heaslip [2020] Insolvency Law Bulletin.

[3] See A simplified insolvency regime tailored to the needs of small debtors, or, The insolvency of micro, small and medium-sized enterprises (MSMEs), Michael Murray UNCCA Fifth Annual May Seminar 2019.

 

[4] Corporate insolvency by the numbers, Jason Harris, 2018

[5] Anderson, The Protection of Employee Entitlements in Insolvency, p 94

[6] Managing the insolvency curve – a new government role is needed? Professor Jason Harris, and Michael Murray, 31 March 2020.

 

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